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UK banks fear that up to 800,000 businesses may fail next year if they cannot defer payments on government-backed loans.
The loan industry is proposing a student loan scheme, where coronavirus loans can become a repayable tax liability for a decade.
Like student loans, the money will only be repayable when companies can afford it.
Banks want the scheme to be administered by HM Revenue and Customs.
HMRC would have the operational power, existing relationships, and adequate business knowledge to manage a program of this scale.
Banking industry lobby group TheCityUK proposes establishing a “UK Recovery Corporation,” through which companies could turn their short-term debts into a longer-term financial obligation to HMRC and pay off debt when they are making enough money. called contingent tax liability.
This, the banks argue, would be much simpler and quicker to organize and manage than the UK government taking direct ownership stakes in hundreds of thousands of companies.
It has been widely recognized that many companies will have a hard time repaying the £ 46 billion in loans taken out so far, under government schemes designed to help companies survive the coronavirus crisis.
Government guarantees of between 80 and 100% are for the lender, not for the borrower. This means that the government can pay banks, but troubled companies will remain in default and are therefore likely to fail.
Simply put, government guarantees to lenders will not save companies that apply for loans or their employees.
The lure for the banking industry is that they will not incur the reputational damage of having to seek out small businesses for repayment of loans that are already largely guaranteed by the government.
And the government will not be left with accelerated losses when the banks cancel the loan and request their government guarantees.
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The banking sector argues that the scheme would be a better alternative to government bailout agreements.
If such a scheme were introduced, companies could defer the interest repayments on debt that begin to mature in March 2021, at a time when they will already have faced an accumulation of VAT and commercial rate invoices, plus the expiration of the Work withholding scheme, which has seen the government pay 80% of the wages of more than 9 million people.
Over time, the banks say, these business notes could be divided and sold to investors, just like the student loan debt packages and bad loans from the financial crisis, which took it out of the government’s hands.
The government is already committed to most of this debt through its coronavirus loan guarantees to banks. Banks would also enjoy the opportunity to earn any fees associated with organizing these sales.
The Treasury described the proposals as “a useful contribution to the discussions on how companies can best be supported in this difficult time.”
Debate on government intervention.
However, on Tuesday, the chancellor said the bar for government intervention was “very high” and should be “exceptionally rare and only in situations where companies have some strategic value, clearly have a viable long-term future and where creditors and shareholders have a shared burden and are not just looking for a free trip for the taxpayer. “
The financial services industry responds that this would not amount to direct ownership participation and that the government has already clearly recognized that a labor apocalypse is on the horizon.
Without a means to turn a short-term debt emergency into a longer-term repayment plan, it will arrive in March of next year.
These proposals are unlikely to be the final answer. They could be subject to abuse, like any large and quick intervention. For example, there should surely be some conditions so that companies cannot pay their own shareholders large dividends after having parked their debts for the time being.
Many will also scoff at the banks’ nerve to try to offload the balance sheet problem to taxpayers after what happened a decade ago. But to be clear, the government has already guaranteed most of these debts. It is already a taxpayer’s problem.
Sooner or later, the government will have to pay a massive bill for this crisis. Banks argue that the later the bill arrives, the less it will be for the taxpayer and the less damage to the UK social fabric.
