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According to figures from the Treasury, businesses in the UK have received approximately £50bn in government assistance.  Of this, approximately £34bn has been in the form of “bounce-back” loans.  These are loans to small businesses of up to £50K each and backed by a 100% “government guarantee”.  Of course, government guarantees aren’t actually secured out of the personal finances of government ministers, they are secured out of taxes.  So what does this mean for the taxpayer?

Memories of 2008

From a financial perspective, it’s hard to avoid the temptation to make comparisons with the infamous bank bailout of 2008.  While this is understandable, it’s also more complicated than it might look at first glance.  The financial crisis of 2008 involved a very small number of very large companies.  The Coronavirus crisis is having a widespread (albeit variable) impact.  The “bounce-back” scheme, in particular, was created to offer a fairly low level of support to a very large number of small businesses.

What that means from the perspective of risk is largely a matter of opinion.  Some people might argue that the bank bailout was a higher risk because it handed out very large sums of money to a very small number of companies.  Others, by contrast, might argue that the bounce-back scheme is riskier because its target market comprises smaller companies across a wide variety of industry sectors.  This means that it’s practically inevitable that some of them will end up going to the wall, taking the loan money with them.

Can the “bounce-back” loans be paid back?

Realistically, it seems safe to assume that some percentage of the bounce-back loans is going to end up as bad debt.  It’s public knowledge that major companies are suffering.  Some are going out of business completely.  Others are curtailing their operations.

It seems highly implausible to think that big-name businesses could be feeling this sort of pain while smaller ones escape unscathed.  A more reasonable explanation is that the mainstream media, understandably, only reports on the larger businesses because they are the names most people will recognise.

What’s more, large companies tend to generate businesses for smaller ones.  Firstly, they will have their own direct vendors and suppliers.  Secondly, they will encourage the growth of local service industries which want to tap into the customer base created by the presence of the large company.

This second point has clearly been noticed by the government and the Mayor of London.  Both have recently started encouraging businesses to recall their workers to the office.  Neither has made a secret of the fact that they are concerned about the fate of the small businesses, which have been set up to serve these office workers.

Cynics might wonder if this concern was linked, at least in part, to the possibility that some of these businesses will have taken out bounce-back loans.  If the businesses go under, then the loans become uncollectible – and the taxpayer picks up the tab for them.

Should the bounce-back loans be paid back?

This is another, very interesting question.  Back in 2008, the bank bailout stirred up a heated debate about “moral hazard”.  It still rumbles along to this day.  The banks, however, were global businesses which essentially created their own problems.  Recipients of bounce-back loans are small and/or local businesses, which were hit by a crisis which was not of their making.

What’s more, they weren’t even allowed to make their own decisions about how to respond to it.  The government ordered a shutdown of all businesses it deemed non-essential.  In other words, it effectively took away their ability to do business.  You could, therefore, make a case for arguing that the bounce-back loans should simply be converted into grants and viewed as compensation for being forced to stop trading.

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