Borrowing conditions back in the red as ChX pulls out credit easing

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EEF released its latest Credit Conditions Survey today and unfortunately the news is not good. A higher net balance of companies (17%) is seeing the overall cost of finance rise and worryingly after two quarters of improvement, a net balance of companies (3%) also saw the availability of credit worsen.

This is an additional barrier to investment when we can least afford it given the challenging short-term demand outlook is already a considerable deterrent.

Looking at just new lines of borrowing, a balance of 24% of manufactures reported an increase in cost, rising to 31% for just small companies. This compares with 8% and 3% respectively last quarter. A notable deterioration.

Also fees on existing credit lines, a pet-hate of ours and I think the clearest indicator of not enough competition in banking, increased for a balance of 21% of companies, the highest since 2011q1.

EEF's own survey comes on the back of last week's SME Finance Monitor, published by BDRC Continental and financed by the major UK banks, which showed that manufacturers were more likely to have new/renewed loan requests declined. In addition, 37% of new/renewed loan requests by manufacturing companies required security compared with 25% for the overall sample.

The situation must have the Chancellor worried ahead of tomorrow's Autumn Statement. Treasury officials were busy briefing over the weekend on the ChX's ‘credit easing' scheme – basically designed to use the government's ability to borrow cheaply to pass on lower costs to firms looking to borrow.

Lots of detail still to come on that but intent-wise credit easing looks positive – and at the least is a welcome admission from the government that the Merlin agreement was not a fix-all for UK companies' access to finance issues. In particular the Merlin agreement to increase lending from the major banks had nothing to say about cost; whereas this seems the focus of credit easing.

The caution I would have is the mechanics of the scheme to ensure there is actually a benefit passed through to small companies looking to borrow – rather than a new implicit government subsidy to banks being gobbled up on the way through. Treasury is promising audits of lending books to ensure this ‘additionality'.

Even establishing additionality still might not help with the visibility of cost reductions for firms that borrow. This is because we are entering a period where banks' funding costs are about to rise as many of them seek to refinance themselves in 2012 – potentially further hampered by any euro-meltdown.

But ChX is having a crack and we shouldn't rush to judgement until we've seen a few more details.

Given Mr Osborne has now showed some enthusiasm for bringing the cost of finance down, would it be too presumptive to assume that ChX also plans a strong response on boosting competition in the banking sector when he responds to the Vickers Commission recommendations in mid-December?

Or has he used up all his ammo with the banks by a rumoured increase in the balance sheet levy to be announced tomorrow?

In the long run boosting competition in the banking sector has to be the focus of sustainable improvements in access to finance in the UK.

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