Increasing Fuel Helpful but Growth Engine Needs Fixing
Commenting on the first Extended Collateral Term Repo (ECTR) auction, Simon Collins, KPMG chairman elect and adviser to businesses on their lending arrangements, said: “We welcome all efforts to free up capital for business lending but there are still two giant conundrums blocking a clear path up and out of this downturn.
“First, banks are torn between being asked to both lend more and take a more risk averse approach to lending. Secondly, how do individuals and businesses get the confidence to want to borrow to invest and spend? The latest set of credit conditions data for the first quarter of the year shows us that the amount of credit being made available to businesses is either flat or decreasing, but also that the demand for credit from most businesses fell. At the same time default rates increased for medium and large companies, showing that life isn’t getting any easier.”
Bill Michael, UK Head of Financial Services at KPMG, added: “Various techniques to get the economy airborne have stalled and the plane remains stranded on the runway. It is hoped that the ECTR is the liquidity fuel to revive our economic growth. At the same time, however, there is an overwhelming need to redress the country’s overleveraged balance sheet. This translates into a lack of demand: banks would like to lend to those who don’t need the money. We don’t just need a ready supply of cheap fuel, we need to fix the plane and monetary policy is running out runway. It is also important that we are not distracted by the Eurozone crisis in our efforts to resolve the complex challenge of developing an environment for sustainable growth. Fixing the plane is hard work.”
Simon Collins, a debt adviser with extensive experience advising the country’s largest companies on their lending, and Bill Michael, who has advised banks for many years, are available to discuss the subject in more detail.