Better corporate bond markets? Credit easing no clearer as QEII sets sail

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On Monday, Chancellor George Osborne announced at the Conservative Party Conference that his officials were working on options for credit easing. Since then there has been intense speculation about precisely what he means by this.

Yesterday the Governor of the Bank of England, Sir Mervyn King, did a round of interviews explaining the MPC's decision to start QE again by voting to extend its asset purchases facility by £75 billion. The focus for the purchases will very much be gilts (rather than a riskier range of private sector assets).

This morning, the Chancellor was again speaking, this time on The Today Show to discuss QE and his own announcement. Some interesting thoughts came out of this.

The Chancellor repeatedly stressed that both he and the Prime Minister have been consistent since they were in opposition in saying that the current situation called for fiscal prudence but monetary radicalism. Like Monday he again seemed to be pushing the idea that his credit easing policy was in the monetary sphere of macroeconomic policy.

But he also noted that it was the bank's domain to expand the volume of credit (via QE) but the government's to steer it to where it needed to go in the economy, including to SMEs (via CE).

Asked further what credit easing meant, the Chancellor said there were several options being explored. He mentioned the relative size of the UK's corporate bond markets compared with those in the U.S. In the UK minimum corporate bond issuance seems to be £100-200 million. In the U.S. as little as $25 million can be raised in these markets.

This has been an issue floating around 1 Horse Guards Road (HM Treasury) since at least July 2010 as it was included in the government's access to finance green paper as a weakness in the UK funding environment that may need strengthening.

No doubt this is a weakness worth looking to strengthen. But I wonder if it is the priority. SMEs (say firms with turnover of up to £25 million) are consistently reporting the worst access to finance. Even if corporate bond markets could be made as accessible tomorrow as in the U.S., this isn't going to help SMEs.

So this suggestion seems to me more about having a meaningful outcome from the government's current Mid Caps Growth Review than targetting the most important problems afflicting the flow of credit to SMEs.

The government action is a little unclear too. Are they going to create demand by buying these bonds - with fiscal implications? Are they going to try to bring down some of the hurdles companies face to issuing bonds - such as fees from ratings agencies? And how quickly will this influence change, even were the government sitting ready to buy billions of corporate bonds tomorrow, will companies be in a position to issue them?

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