• Chancellor’s ‘whatever it takes’ package isn’t enough (yet)
• Genuine debt relief should be applied to business and mortgage borrowers
• Current measures help with cashflow but not the production chasm coming our way
Kevin Doran, chief investment officer at AJ Bell, comments:
“In a set piece that invoked the ghost of Mario Draghi, the Chancellor rolled out his ‘whatever it takes’ package of measures designed to contain the impact of the coronavirus on the economy. Overall it’s a powerful package of cash flow measures that amount to assistance somewhere in the region of 15% of GDP, but what’s missing is any real help to fill in the production chasm that is coming our way over the next few months. If this is ‘whatever it takes’, I’m afraid ‘it just isn’t enough’.
“For the regular man on the street, the headline grabber will be the 3-month payment holiday on mortgages. Whether the banks will continue to accrue interest on the outstanding balances isn’t clear yet. If it’s a simple payment holiday, then that’s pretty much what any bank would offer all customers in payment difficulty – nothing new here. If it’s debt relief, then that’s different and represents quite a hand-out to the public given that there’s £1.3 trillion of mortgage debt in the market earning the banks an estimated £6.5bn of interest every quarter.
“For businesses, there’s the offer of tax breaks, grants and access to £330bn of low-cost loans with a 6 month interest free period. Again, there’s a need to see details here, but it’s best thought of as giving interest free loans to corporates to cover cash flow issues during the lock-down. What’s most interesting here is the setting up of a lending business within the Bank of England itself in the form of the Covid Corporate Financing Facility (CCFF), which will see the Central bank not just take on private debt to its balance sheet (which it did a bit of in 2008/09) but actually originate the loan itself direct with the business issuing the commercial paper. Interesting, but again a cash flow tool, not one that replaces lost production.
“Why households are possibly receiving relief and corporations are getting low-cost loans is probably as much a function of politics as it is economics, but if the Chancellor was serious about being brave and bold and all those other adjectives he tossed about, the smart thing to do would be to give genuine debt relief to both businesses and households, with interest written off on debts for the entire six month period. And whilst you’re at it, extend the holiday to all forms of consumer debt. Secured and unsecured. If you’re going to do ‘whatever it takes’, make sure that it’s big, simple, effective and powerful.
“By our calculations, the total interest received by the banks on their loan books amounts to around £28bn per quarter. Wiping out the interest on those loans for six months would shave £56bn or so from the bank’s profit and loss and tip the entire sector into the red for the year, but would amount to only 3% of all loans outstanding and a touch over 12% of the bank’s risk capital. As a percentage of GDP, it’s a giveaway of around 3%, which, whilst we’re at it, we should top up with Government support for the 5 million people who pay rent instead of mortgages in the UK.
“There’d need to be follow up action for sure. Someone needs to force the accounting bodies to accept that we’re on a war footing here and so relax provisioning requirements at the banks for bad debts, and there may even need to be a way of issuing preference shares to UK Government Investments to ensure that the losses taken by the banks don’t result in slower credit growth in future, but we can sort that out further down the line.
“There’s also a certain symmetry to a bigger debt relief package as we propose. Back in 2008/09 it was the banks that peered over the precipice and were dragged back from the abyss by the public. With the public now staring down the barrel of an unknown threat, seems only right that the banks get involved in bringing hope where there is despair.”