Germany’s 100pc guarantees highlights shortcomings of UK loan scheme

As Germany’s financial “bazooka” fired again at the coronavirus this week, ministers in London may be looking once more at their own misfiring weaponry.

Europe’s biggest economy has raised the stakes in its fight against the outbreak by moving to guarantee 100pc of loans to small and medium sized businesses.

Under its expanded “instant loan” scheme, any German firm employing between 10 and 50 people can gain credit equivalent to up to three months’ turnover, capped at €500,000 (£439,000). Those with up to 250 employees can access €800,000. 

The extended measures form part of a €1.1 trillion package thrown at the economy by Berlin amid concerns that loans – previously up to 90pc guaranteed – were taking too long to reach businesses shuttered by the lockdown.

“We’ve already talked about the famous ‘bazooka,’ there is no limit for that – and of course in this case, there is no limit,” Peter Altmaier, the economic affairs minister, said.

There are conditions to the largesse. The 10-year loans will cost 3pc, and only go to firms which were financially healthy last year. But crucially for lenders, Germany’s state-backed investment bank KfW will provide them with 100pc liability waivers backed up by government guarantees.

The aim is to protect the Mittelstand businesses which form the backbone of Germany’s economy. This “unique broad-based cornerstone”, in Altmaier’s phrase, spans almost 440,000 companies employing 13 million people, according to Eurostat.

But while Germany pulls out all the stops to shovel money out of the door, increasingly loud questions are still being asked over the UK’s own Coronavirus Business Interruption Loan Scheme (CBILS). 

CBILS loans, although interest free for a year, are only 80pc guaranteed by the Government, which critics say puts the onus on lenders to delay the flow of much-needed credit. As of last week, less than 1pc of firms out of 130,000 enquiries had finance approved, while banks in the eye of a storm of fury said they were carrying the can for a badly-designed scheme.

The latest Covid-19 tracker from the British Chambers of Commerce is unlikely to quell the row, however. It showed no improvement in access to CBILS – at just 1pc – while 8pc of applications were unsuccessful.

The BCC remains hopeful that changes to the scheme last week such as the banning of personal guarantees on smaller loans announced by Rishi Sunak, the Chancellor, should improve things.

Adam Marshall, the BCC’s director-general, is reserving judgement for now on whether the UK should go down the German route of 100pc loan guarantees but says pointedly that “the acid test will be how quickly they get cash to ailing companies on the front line”.

The Federation of Small Businesses goes further. Mike Cherry, its national chairman, calls the CBILS approval rate “derisory” so far and adds: “Transparency is key here: we need to see that data updated publicly on a weekly basis. If change doesn’t come, then all options need to be on the table – including an upping of the 80 per cent government guarantee.”  

For all the big billions bandied around by the Treasury, business groups say sotto voce that the lion’s share are wrapped up in guarantees, potential claims on the Government’s balance sheet rather than practical support. If the loans can’t be made fast enough to save businesses from failing “the contingent liabilities don’t actually help,” said one. 

Germany has been running a surplus – to the frustration of countries elsewhere in the Eurozone – for years, so it has more firepower to bring to bear. But the 100pc guarantees still bring with it a “higher fiscal risk”, according to Oliver Rakau, a European economist with Oxford Economics.   

How much the move could eventually cost is anyone’s guess, according to Rakau. But he adds that the Federal Reserve, which is now financing small business loans, is assuming around 10pc could fall through “either partially or fully”. That could leave prudent Germany with a bill running into the tens of billions depending on the take-up.

He says: “There is a risk of moral hazard in that firms that usually would not get a loan at all are now getting it, but given the rule that the firm needs to have been in good health, you have some risk reduction.”

Rakau adds: “It is just the question of what is the larger cost. If you have an economy on full lockdown, if you want firms to still be there it is cheaper to keep them afloat and risk losing money on some loans, instead of having to finance the recovery and rebuild companies afterwards, which would be much more expensive.” 

UK firms scrambling for loans could be pressing the Chancellor to follow Germany’s lead before long.

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