Monday, 13 February 2012
For UK firms, the credit crunch continues
Simple question; if quantitative easing is working then why are UK companies paying back their bank loans?
Since 2009, the growth of bank lending to the UK corporate sector has been "negative". Loan repayments are greater than new credits.
If quantitative easing is supposed to support the private economy, then we should expect companies to be investing in new plant and equipment. The idea that was used to sell QE was that commercial banks would sell the Bank of England bonds, receive newly minted cash and then extent that liquidity as new loans to the private sector.
The chart above tells us that isn't happening. Instead, the corporate sector is being starved of new credit and the UK economy is stagnating.
Why are firms repaying their loans? I will take a wild guess and suggest that it is complex mix of demand and supply factors. Firms aren't demanding loans because they fear for the future. When central banks print money, inflation is sure to follow, and interest rate policies are likely to be more erratic. Anticipating a chaotic future, firms prefer to pay down their loans to minimize their exposure to higher interest rates and macroeconomic instability.
Banks are wary of lending to firms. They, too, see the same future private sector firms do. They are reluctant to extend credit to a private sector that will struggle when the full consequences of QE are brought to bear upon the beleaguered UK economy.
If supporting the private sector was the objective of quantitative easing, then it has manifestly failed. It is time to put a stop to this ridiculous policy.