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Wednesday, December 17, 2008

UK Report: New Government Scheme to Restart Business Lending

by Calculated Risk on 12/17/2008 09:52:00 PM

From The Times: Alistair Darling aims to guarantee business lending

The Chancellor is considering a national lending scheme under which the Government would guarantee new lending to businesses of all sizes as one of his leading options.

If past loan schemes are followed, the Government would cover most of the risk on each loan, possibly up to 80 per cent, and the bank would bear the rest. The taxpayer could be faced with a big bill if companies defaulted, as some certainly would. The default rate of firms involved in government loan schemes since 1981 is 28 per cent.
The article notes that the government is trying to limit this program to new loans only, and not for refis of existing business loans.

The problem is partially that banks have tightened standards, but also that loan demand has fallen sharply (not many companies are looking to expand or invest right now). Guaranteeing lending might loosen standards, but I fail to see how it encourages companies to borrow.