RUTH SUNDERLAND: Coronavirus has exposed Britain’s blindness to the dangers of debt – this time, it is not the banks that are the prime risk, but their corporate customers
The pandemic has ruthlessly exposed many weaknesses, but one of the biggest is Britain’s blindness to the dangers of debt.
This time, it is not the banks – which begin reporting half-year results this week – that are the prime risk, but their corporate customers. One worrying parallel with the financial crisis is that taxpayers are on the hook for billions of pounds of potential losses again, just as we were back then.
In the short term, the response to the pandemic has been to offer cash-poor firms access to even more emergency borrowing.
Debt pile: This time, it is not the banks that are the prime risk, but their corporate customers
As Alex Brazier, the Bank of England’s executive director for financial stability, said recently, this is not a run on the banks but a run to the banks, driven by fear about access to finance.
There are many shocking statistics, but consider just one: the banks lent £30billion in March – 30 times normal levels.
The sobering aspect is that much of this additional debt is underwritten by us as taxpayers, who ultimately pay for Chancellor Rishi Sunak’s flotilla of lifeboats.
It raises an obvious question: why throw even more loans at businesses that are deep in the red, some of which are zombies with no reasonable hope of recovery?
The answer is analogous to the reason for lockdown: we need to ‘flatten the curve.’ The immediate priority is to prevent a tidal wave of businesses going bust all at once, swamping the banking system, throwing millions out of work and squashing all hope of a robust recovery. But in the longer term many businesses will need to be recapitalised. Debt’s fine in the good times but in the bad times it makes firms vulnerable, acting as a drag and a deadweight.
Far better for them, and for the economy overall, if companies relied less on debt and had better access to equity finance.
Large stock market-listed operators raise capital through rights issues, where existing investors are offered the chance to buy additional shares, usually at a discount.
That doesn’t help the thousands of unlisted companies which need new capital not just to get through the crisis but to fund future growth and innovation. The ‘equity gap’, or shortfall in capital, has been brought into focus by the virus but has in fact dogged the UK economy for decades.
In the US, there is a vibrant venture capital industry that has driven the tech boom. In Germany, they have the KfW or Kreditanstalt fur Wiederaufbau – the credit institute for reconstruction – which supports that country’s fabled Mittelstand of medium-sized family firms.
Here, we have no equivalent of either.
Too many promising British firms are shunned by private equity, left to rely on bank loans, and find their growth stunted.
Post-coronavirus, there will be a huge opportunity for investors to back businesses that are sound but have been pummelled by the pandemic. After the financial crisis, there were curbs on banks’ leverage and requirements imposed for stronger capital buffers to protect taxpayers.
One question is whether there should be similar controls on large corporates. They could also be seen as too big to fail and therefore pose a risk to the pockets of ordinary citizens if they have to be bailed out.
The most important message, however, is that there already is a perfectly good source of capital to rebuild Britain.
Our insurance companies, pension and investment funds manage £5.2trillion of savers’ cash. If just a tiny percentage more of that was used to recapitalise businesses beyond the stock market, what a difference it could make.