By Colin Borland
It’s been quite a few days. Banks reporting big losses, stock markets tumbling, financial institutions wary about each other’s exposure to bad debts. Stop me if any of this sounds familiar.
While other stories have dominated the headlines over the summer, the crisis in the Eurozone has been steadily building into what some – I hope wrongly – are already calling “Credit Crunch 2”.
Talk of a double-dip recession was bad enough – but two “once in a generation” financial crises in four years? And this time it’s not poor individuals who can’t repay mortgages that they frankly should never have taken out; it’s sovereign states which can’t make their payments.
I’m certainly not qualified to make predictions about which way this latest situation will go. But no one working in the real economy needs to guess what happens when banks can’t borrow against securities of questionable value – they can’t lend and, well, we know the rest. We are still picking up the pieces of the last banking collapse, in many cases with badly burned fingers.
That said, there are positive signs which suggest today is different from 2007–08. Indeed, alongside the write-downs of dodgy government debt, last week’s bank reports also highlight their success in meeting the targets for lending to small businesses agreed under the Project Merlin deal.
If businesses can access finance, they can continue to do business, generate revenues, create and sustain jobs and thus shore up consumer confidence and drive economic growth. So surely hitting the Merlin targets is good news?
Well, if hitting the Merlin targets meant that all the above came to pass, then, yes, it unequivocally would be. The point which the Federation of Small Businesses and others have made, however, is that the Merlin deal is so generously drafted that it may or may not be getting the finance to the businesses which need it.
The first grey area is around what we mean by new lending. Does it include, say, restructuring a debt or simply converting a flexible overdraft facility into a fixed-term loan? And what counts as a small business borrower? One standard definition of an SME (small or medium-sized enterprise) is so wide as to include almost every business in Scotland. And different banks decide themselves who exactly they regard as an SME customer – usually on the basis of the business’s turnover.
The real test, then, is not whether these nebulous Merlin targets are met. It’s how much of the reported lending is reaching the sort of small firms which are vital to the recovery, but which need modest amounts to adapt, consolidate or move to the next stage. And how much is accounted for by a small number of very large loans to a few dead certs?
The fear is that the credit crunch has left lenders taking a “flight to quality”: abandoning risk in favour of guaranteed return. If so, next to some sovereign states, it is surely honest, hardworking small businesses that begin to look like a pretty safe bet – even to banks.
– Colin Borland is head of external affairs for the Federation of Small Businesses in Scotland
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