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Chancellor to announce novel ‘credit easing’ plan to help struggling businesses and avoid the risk of a second credit crunch Growing fears that the euro crisis will prompt a second British banking seizure have led George Osborne to announce unprecedented plans for the Treasury to supply a multibillion credit line direct to British firms, starting with small and medium-sized businesses. Under the novel “credit easing” plan, the Treasury will buy company bonds in an attempt to cut the cost of credit for struggling firms and boost the supply of credit. A Treasury official said: “An aim is to avoid a second credit crunch because of the risks of sorting out the euro crisis affecting the operations of the bond market.” The Treasury is aware of the extent to which the UK banks are exposed if the euro crisis deepens. The chancellor, due to attend a meeting of European finance ministers on Tuesday, has warned of the dangers should the crisis not be resolved during the G20 summit in Cannes, which ends on 4 November. In Osborne’s sometimes grim speech to the Conservative party conference in Manchester, he admitted that difficult days lay ahead but insisted Britain could weather the storm if it stuck to its deficit plan. Borrowing too much was the cause of Britain’s problems – not the solution – he said, rejecting rightwing calls for tax cuts and social democrat pleas for a Keynesian demand boost. Osborne also used his speech to say Britain was abandoning its leadership role on climate change in Europe. Britain will press ahead with plans to cut carbon emissions by 30% by 2020 only if the rest of the EU adopted the targets, he said. He also upset the unions by announcing plans to charge fees of £150-250 for every employment tribunal application, and a further £1,000 if the case reaches the tribunal. The credit easing plan, due to be fleshed out in the budget in November, stops short of a state investment bank but is an implicit admission that commercial banks are unwilling or incapable of supplying credit to British business. Desperate to find new weapons to combat a second credit crunch, Osborne felt forced to propose that the Treasury intervene directly partly because the governor of the Bank of England, Sir Mervyn King, has refused to take the step, insisting the Bank cannot take on the risk. “Because banks are damaged they won’t lend at current rates,” Osborne said. “Everyone knows Britain’s small firms are struggling to get credit and banks are weak. So as part of my determination to get the economy moving I have set the Treasury to work on ways to inject money directly into parts of the economy that need it, such as small businesses.” Under the plan, already attempted successfully in the US, Treasury officials said the Bank is nevertheless likely to act as the agent buying the corporate bonds for the Treasury, but the money will appear on the Treasury balance sheet as a contingent liability similar to the way in which the credit guarantee scheme was set up in the 2008 crisis. Treasury officials said the cost of buying the corporate bonds would not add to the deficit because the government will be obtaining assets in return for its investment. Since the Treasury would be funding, but not directly administering, the scheme ministers would not be directly involved in “picking winners”, the Treasury said. Osborne’s aides denied the proposal could be billed as plan B, but questions remain how the Treasury recovers loans if firms are unable to repay. Opposition politicians said the move represents an admission that the Project Merlin deal between government and banks designed to increase lending to business had failed. Under Merlin the banks said they would increase lending to SMEs (small and medium sized enterprises) to £76bn this year, which equates to £19bn in the first quarter. Ruling out a fiscal stimulus, Osborne argued the world was facing a “debt crisis” that means fiscal expansion carries more risks than potential benefits. “Borrowing too much is the cause of Britain’s problems, not the solution,” he said, adding the bond markets were “ready to pick off the next country that lacks the will to deal with its debts”. Deviation from his programme would “be abandoning the deficit plan that has brought us the stability other nations today crave”. Lord Oakeshott, the Lib Dem peer who resigned as a party Treasury spokesman in February over the Merlin deal, said this was proof the pact with the banking industry had failed. “George Osborne is right to say Britain’s small firms are still struggling to get credit and banks are weak. Everyone knows that, so why won’t the Treasury accept that Project Merlin has failed and we must impose tough new net small business lending targets on the banks. “We taxpayers control RBS and Lloyds with 60% of the SME market – so we must act directly, starting with them, to end the loan famine and let small businesses grow. The top priority is to pull the levers sitting under our noses now to make the banks lend.” Bankers pointed out that government already had a means to buy corporate debt. Labour set up an Asset Purchase Facility in January 2009 that was able to buy commercial paper and corporate bonds but it has not been very active. Recent data from the Bank of England shows it bought less than £100m of commercial paper and £1.3bn of corporate bonds. This compares with almost £200bn of government bonds. In a sign of jitters Xavier Rolet, chief executive of the London Stock Exchange, predicted at a Financial Times fringe meeting at conference that Greece would default within four to six weeks whilst Henry Bellingham, a Foreign Office minister, said it would be within six months. Economic policy Conservative conference 2011 George Osborne Banking Bonds Euro European Union Patrick Wintour Jill Treanor guardian.co.uk