Chancellor Rishi Sunak is set to rebuff City of London calls for a new state-owned body that would refinance tens of billions of pounds of coronavirus loans issued to UK companies.
A task force called the Recapitalisation Group, led by trade body TheCityUK and advisory firm EY, has asked the government to create a new state agency to handle the expected mountain of unserviceable debt accumulated by companies through state-backed loan schemes.
Politicians and economists such as Sajid Javid, Paul Myners and Jim O’Neill have also called on the state to intervene in order to support companies that have taken on extra debt because of the pandemic.
But despite months of talks ministers have given short shrift to the proposals, which they fear could lead to shift in the balance of risk away from banks and towards taxpayers.
The Treasury has dismissed the ideas around recapitalisation of bad loans, according to several people briefed on the situation. It believes banks should deal with the cost and reputational risk of chasing borrowers that default.
One official said that the public wrongly assumed that private sector debt must have “ballooned” during the crisis. “The chancellor is not convinced that this issue is a pressing one as of today.”
Mr Sunak believes that corporate debt levels before the crisis were relatively low on a historic basis. He told a committee of MPs in July that he was open to ideas from the City, but added: “I’m not completely persuaded of the scale of the problem at the moment. I think the simple reason is that we know corporate debt levels in the UK are in a relatively healthy place coming into this crisis.”
The government’s lending schemes have provided nearly £53bn to some 1.2m companies through three programmes: £35.5bn of bounce back loans — that include a 100 per cent guarantee for small business loans; £13.7bn through the coronavirus business interruption loan scheme (CBILS) — which includes an 80 per cent guarantee on loans of up to £5m; and £3.5bn through the large business interruption scheme. This offers a partial guarantee on loans up to £200m.
Many banks are worried about a potential wave of defaults, meaning that — despite the state guarantees — they could end up pursuing thousands of struggling companies through the courts.
The Office for Budget Responsibility, the fiscal watchdog, said that about £33bn would need to be written off the value of state-backed loans in its worst-case scenario. Andrew Bailey, Bank of England governor, has also warned about the threat of the high level of corporate debt to the economic recovery.
Under the City’s plans, the proposed new body, dubbed The UK Recovery Corporation, would be able to convert those loans into special financial instruments, giving companies time to repay the money.
One City executive close to the talks said that the position among Treasury officials had hardened over the summer.
“There is a refusal to recognise that there is a recapitalisation problem,” the executive said. “Even if the recovery is better than first expected there is still a big problem.”
He warned that banks were in effect being incentivised to foreclose on struggling businesses in order to get the government guarantee. “They do not want this debt on their books or to have to chase the money”.
Meanwhile, business groups hoping that the government would prolong the deadlines for applications for its state-backed loan schemes are also likely to be disappointed.
The deadline for CBILS applications is September 30 while the bounce back loan scheme is set to end on November 4.
The Treasury has always said that it could extend the application deadlines but officials have signalled that there is no intention to do so.
A Treasury spokesperson said the government had paid out billions in state-backed loans and grants, paid workers’ wages and deferred billions of pounds in tax as well as bringing in the new £2bn Kickstart scheme for young workers and the £1,000 job retention bonus.
“We’ve been clear these [lending] schemes are temporary and it would not be sustainable for them to continue indefinitely.”