Zombie nation: UK risks creating unviable firms, think-tank warns | Bankruptcy News

Resolution Foundation says government loan guarantees incentivise banks to lend to firms with weak prospects.

The British government has risked creating a legion of “zombie” companies by encouraging banks to lend 45 billion pounds ($62bn) to small businesses with a 100 percent state guarantee during the COVID-19 pandemic, a leading think-tank warned on Wednesday.

The Resolution Foundation said most of the support given by the government to businesses and workers was useful and more would be needed when finance minister Rishi Sunak sets out his 2020/21 budget on March 3.

But it said the structure of the Bounce Back Loan Scheme – which allows small businesses to borrow money equivalent to three months’ sales, up to 50,000 pounds ($69,000) – gave banks an incentive to keep firms with weak long-term prospects alive.

“This could slow down the efficient resolution of these firms, and could be of a sufficient scale to have macroeconomic implications,” the think-tank said.

“Allowing firms which are not viable in the long term to continue operating can impede the reallocation of capital and labour from less productive firms to more productive firms.”

The Bank of England has warned that the pandemic will leave many firms heavily indebted and in need of restructuring and more investment from shareholders.

Sunak U-turn

Sunak had originally opposed a 100 percent state guarantee for low-interest lending to small businesses but changed his approach in April after firms struggled with the credit checks needed to get emergency finance from banks.

Last week he said businesses would be able to spread loan repayments over 10 years, rather than six and to delay starting repayments by a further six months.

The Resolution Foundation, which normally focuses on issues affecting low-paid workers, said Sunak should require banks to take on 20 percent of the loan risk in exchange for a payment from the government, as a way to discourage lenders from propping up firms that would never repay their loans.

Britain’s Office for Budget Responsibility estimated in November that defaults on the programme would cost the government 27 billion pounds ($37.3bn)