Unless credit - on which companies depend for day-to-day business - starts to flow again, other government initiatives will be “ineffective and expensive failures”, he warned in a pre-Christmas letter to all CBI member companies.
Following extensive consultations with firms around the country, Mr Lambert set out four crucial initiatives that the government must urgently adopt to tackle the problem. They include measures being used by the US government to lend money to firms in the short-term, and by the French government to make trade credit insurance available.
Crucially, the government, the Bank of England and the FSA must ensure that banks are not being forced to deleverage too rapidly, which would suck finance out of the economy too fast, crippling otherwise healthy firms and causing long-term damage to the economy.
“We still need to address the root of the problem,” says Mr Lambert in his letter.
“Credit flows, on which companies depend for day-to-day business, remain severely constrained. Until this underlying issue - getting credit flowing around our economy again – is resolved, economic activity cannot begin to recover. Otherwise healthy companies will face increasing difficulties, and some will struggle to survive.
Mr Lambert makes clear that the CBI has four solutions to offer. That the banks should feel able to deleverage slowly. That the Bank of England must be able to accept corporate sector paper. That there should be a top-up scheme for trade credit available to all, and most importantly that the current re-capitalisation of the banks needs re-thinking, because 12% is too punative.
He continued: "Where necessary, government itself should provide interim credit, capital and liquidity directly to offset the shortage in the private sector. The urgent needs of the automotive sector for targeted bridging finance aimed at its distribution network are a case in point.
“Furthermore, other government initiatives to mitigate the recession will be ineffective and expensive failures without action to tackle the issue of credit flows. Fiscal measures are not a substitute for further action to tackle this core problem.”
In detail, the four urgent initiatives called for by the CBI are:
- The pace at which the banks deleverage their balance sheets is critical to their ability to continue to lend. The government, the FSA and the Bank of England should ensure that banks are not being forced, through official sanction, to deleverage too rapidly, and that official guidance on capital requirements is flexible and supportive.
- Non-financial companies will need to roll over some £138bn of their debt in 2009. To ensure that otherwise-viable companies do not find themselves in difficulties if credit remains scarce, the Bank of England should be empowered to participate in the capital markets through the direct acceptance of corporate sector paper, similar to the Commercial Paper Funding Facility introduced by the Federal Reserve in the US.
- Trade Credit Insurance underpins many small and medium size firms’ ability to trade. Where increasing risk (currently driven by credit factors beyond the control of either the insurer or the insured) is forcing private sector insurers to reduce the amount of cover available, the government must ensure continued provision. Government provision, though, still needs to base itself on an assessment of true risks and avoid undue distortion of the market. We suggest a top-up scheme, along the lines of the French model. This should be time-limited, not exceed 50% of total cover, and should be available to all, not just the smallest companies, to avoid pinch-points in supply chains.
- To ensure that the banking system is able to balance its need to recapitalise with its ability to continue to lend, the government must make clear that it is ready and willing to provide further recapitalisation of the banking system where necessary. The punitive terms of the current recapitalisation offer, with a 12% yield on the preference shares, act as a disincentive, and need rethinking. At present, they distort the market for new capital by effectively setting a minimum price, as well as being uneconomic to the borrowers.
The CBI is also continuing to lobby government on other policies to limit recession. It set out a 10-point plan in a letter to Downing Street in advance of the pre-budget report last month, and progress has been made.
The government has adopted the CBI’s suggestion to help contain business costs by making improvements to business taxes in the areas of empty property rate relief, the exemption of remitted foreign dividends, tax relief for businesses now making losses, and amendments to proposals on aviation duty and vehicle excise duty.
It has also recognised the disproportionate impact of the downturn on SMEs, and improved their tax and cashflow position. There were also helpful measures in the fields of capital spending, skills and export support, which the CBI had also pressed for.
Following calls from the CBI, the Pensions Regulator has indicated that more flexible deficit recovery plans will be permitted. Further announcements on how Train to Gain funding is being re-jigged to be able to respond to rapidly-changing business needs are expected in the near future. Furthermore, the Financial Reporting Council has acknowledged that current economic uncertainties can challenge ‘Going Concern’ status, and has issued guidance to directors to help avoid unnecessary qualifications to it.
The CBI will continue to work to ensure that government is fully aware of all the issues that are critical to the health and performance of the corporate sector during the recession. Some government initiatives have been applied in a piecemeal fashion and a good number do not yet go far enough.
