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Summary
- UK Government comes forward to Rescue Large Firms with Project Birch
- The last resort plan designed to support strategically crucial companies
- Different plans of the government to cater to different requirements amid Corona induced crisis
In a scenario when many British firms are seeking Government support to sail through the corona disruption, UK Treasury has lent a helping hand by announcing its plan on May 25, named “Project Birch”, to rescue them.
The large-sized firms, like Jaguar and Tata Steel, whose failure could cost the entire British economy dearly, are likely to benefit from this plan. While Jaguar is said to be seeking a bailout amount of around £1 billion from the Government, Tata Steel has officially quoted that it needs an aid of £500 million to survive. Similarly, the leading aviation firm of UK Virgin Atlantic is in a big financial mess and reportedly owes a total of £250 million to banks.
The British travel industry is reeling under heavy losses, and according to expert estimates, a £37 billion fall in income from domestic and foreign visitors is expected this year.
Another distressed industry is the UK car industry. As per the data from the UK Society of Motor Manufacturers and Traders, the car industry has lost output of about £8 billion, with car plants being shut till May this year.
Details of the Project Birch Program
Under this ambitious plan, Rishi Sunak, the UK Chancellor has raised the Treasury capacity to manage bespoke bailouts. It is applicable to viable British companies which have exhausted all possible options, including loan schemes currently being offered by the government. The scheme is expected to benefit the sectors of steel, aviation and aerospace, amongst others, which are badly hit due to the corona led economic downturn.
In an extreme case, the government is likely to buy an equity stake in an organisation facing serious financial concerns, though the first option remains to extend a loan facility. This is a risky proposition as the government will end up into a loss in case the business is not able to survive.
The project is seen as a last resort plan to support strategically crucial companies. A similar such rescue model was used during the economic crisis during the 1970s in Britain under the then PM Margaret Thatcher.
Government’s Earlier Plans to sail through corona crisis
The government had announced many other plans in recent past to help the ailing corporate sector of the nation like the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loans Program.
Coronavirus Business Interruption Loan Scheme (CBILS)
The scheme was launched on May 4 to enable small businesses taking easy-to-access loans of up to £50,000, thorough a short online form submission. A nominal interest rate of 2.5 percent will be applicable to these loans. Government has given 40,564 loans worth over £7.25 billion under this scheme till May 19, 2020 (as per government’s latest statistics).
Bounce Back Loan Program
The bounce-back loan scheme allows UK based small and medium-sized companies to avail a business loan between £2,000 to £50,000. No interest will be charged till a period of 12 months, after which the companies will have to bear a 2.5 interest rate per annum on the loan amount. The UK government has provided 464,393 Bounce Back Loans worth £14.18 billion, till May 19, 2020 (as per government’s latest statistics).
Coronavirus Large Business Interruption Loan Scheme
This scheme aims to help medium and large-sized firms in the UK to access loans up to an amount of £200 million. UK Government has allocated £359 million to be granted through this scheme. The scheme has seen 86 approvals till May 19 this year, with loan approvals worth £0.59 billion.
Coronavirus Job Retention Scheme
The scheme was announced in March this year and promised to pay 80 percent of the salaries for furloughed workers, up to £2,500 every month. It will continue until October 2020. This scheme has been successful in saving the employment of almost 8 million workers, and more than 1 million firms across the nation, especially in the small-scale sector. Total money claimed under the scheme was £ 11.1 billion up till May 19, 2020, as per government’s latest statistics.
Covid Corporate Financing Facility (CCFF)
This financing is being offered by the BoE to support companies during these hard times. It has funded £18.8 billion of lending to 55 UK firms till May 19 this year. The Airline EasyJet had also secured a loan worth £600 under this facility from the central bank in April this year.
Apart from these, the British government has also provided 2 million Self-employment Income Support (SEISS) claims totalling £6.1 billion as of May 19 this year.
Government borrowings at a record high level
It is pertinent to note that the corona times have hit the UK Government so hard that its borrowings have peaked steeply. In April 2020, Government borrowings were 62.1 billion pounds as compared to a level of less than 20 billion a month earlier, according to the UK Office of National Statistics (ONS) Data. This is the biggest ever recorded monthly borrowing figure in the country’s history. It is predicted by the Office for Budget Responsibility (OBR), that total UK borrowings for the year 2020 could jump to a record high level of £298 billion. While the Government support is rising across all sectors, its tax collections have gone down sharply, making its financial discipline go haywire. This is clearly an unsustainable economic position and the biggest ever financial crisis the United Kingdom has faced. The GDP is expected to fall by around 20 percent in this quarter of April to June 2020.
With the Bank of England in a desperate situation to give a big push to the corporate investment, is now contemplating the unthinkable, lowering the interest rates to a negative range. While there is a fear that savers may not accept this new reality, where they need to pay the bank to keep their savings, it’s only the future which knows if this will actually boost the level of loans.
