Big Boys Could Give Cold Comfort to Smaller Firms; Professor Says They May Step in to Solve Credit Problems

Western Mail (Cardiff, Wales), February 19, 2010 | Go to article overview

Big Boys Could Give Cold Comfort to Smaller Firms; Professor Says They May Step in to Solve Credit Problems


Byline: Aled Blake

LARGER businesses should provide financial support to smaller "brethren" as the economy goes through a credit-less recovery, according to a leading economist.

Arguing that the recovery probably began in the UK in the third quarter of 2009, Professor Patrick Minford, of Cardiff Business School, said the problem of credit growth is continuing to affect global economies.

Official data from the Office for National Statistics has said that in Q3 of 2009 the economy contracted by 0.2%, with GDP moving into positive territory in the final quarter of the year, with growth of 0.1%.

Prof Minford described the data as not being credible, pointing to purchasing managers surveys, employment data, retail sales and production figures as signs that the economy was expanding "fairly convincingly" by the fourth quarter of 2009.

Writing in Julian Hodge Bank's quarterly economic bulletin, Prof Minford - the bank's economic adviser - said that credit growth to UK firms has been negative, with households experiencing negligible growth.

Prof Minford said: "The biggest concern about this pattern of intermediation is that it might leave small and medium-sized firms starved of capital while big firms, able to use the equity and bond markets, enjoy plenty.

"However, this is to ignore the ingenuity of markets in exploiting opportunity - in this case reintermediation of funds to SMEs via the large firm sector.

"A bit like 'cash back' from a supermarket, SMEs can get spare cash from their larger brethren.

"There is anecdotal evidence that such funds are available on the market."

The continuing lending crisis was illustrated in the Bank of England's latest Trends In Lending survey, which reported an 8.1% year-on-year fall in the stock of loans in December - the biggest decline since the series began in 1999.

The Bank's Monetary Policy Committee has said it is particularly concerned about a shortage of credit for SMEs. Prof Minford questioned whether there could be such a thing as a "credit-less" recovery.

He said: "It is an unusual idea, yet that seems to be what we are observing.

"Certainly the market cost of capital has come down sharply in the past year for the average borrower.

"While that may be leaving some marginal borrowers out of the picture, it seems that for firms willing to try hard enough to find funds, find them they can. …

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