Taxpayers to fund 'safety net' for banks as firms offered £10bn of loans

BUSINESS Secretary Peter Mandelson will today announce government plans to underwrite more than £10 billion of short-term bank loans, the latest measure to protect businesses from the freeze in lending caused by the credit crunch.

Lord Mandelson will announce that the taxpayer will offer banks insurance against short-term loans going bad if the recipient firms fail to survive the recession.

• Bill Jamieson's business blog: Next step - full nationalisation of the banks?

It comes after Ben Bernanke, the US Federal Reserve chairman, yesterday warned that the timing and strength of the recovery was "highly uncertain".

The money will be targeted at small and medium-sized firms which are "viable" concerns but which have been struggling to survive because of the difficulty in accessing loans.

Lord Mandelson will reveal details of how the proposal, an extension of the £1 billion small loans guarantee scheme announced in November's Pre-Budget Report, will operate in practice.

But indications from Whitehall last night were that it would not be a fund on which all 4.7 million UK small businesses could call.

Instead, help would be provided to pay day-to-day bills and to ensure long-term investment plans could proceed.

Medium-sized firms regarded as strategically important to the UK economy because of the type or volume of their exports would head the queue for assistance.

Companies employing up to 250 people, and with turnover of around £50 million a year, are likely to fall within the scheme's remits.

Lord Mandelson, speaking after yesterday's Cabinet meeting, promised to deliver "real help which targets real need which is going to make a real difference".

He said: "I want to make sure when we intervene, we intervene in a way that is really effective, really targets genuine business needs in a way that gives value for money from the government and the taxpayers' point of view, and is genuinely going to help businesses in what is a very difficult credit situation."

The Tories claimed the government was merely stealing their plan for a £50 billion national loan guarantee scheme, which would be self-financing as firms would pay a charge to the banks for the cash.

Separate reports put the total amount of loans that would be guaranteed at around £20 billion, but Lord Mandelson refused to confirm figures.

It is understood that the risk to the taxpayer would be around several hundred million pounds. Rather than refunding any bad loans in full to the banks, it would merely cover the insurance charges.

A spokesman for the Prime Minister said ministers had been working "intensively" with the banks on the details of the scheme. Responding to concerns that the government could be saddled with debts of failing firms, he said it was targeted at viable companies that were struggling to get credit as a result of the freeze in bank lending. He said: "I think there is a specific issue in relation to the need for short-term funding for viable companies who we would not want to go under at this time.

"We want very much to target our support on the good companies, on the viable companies, on those companies that are in a strong position to repay their loans but, because of the global financial crisis having closed money markets for finance across the world, are as a consequence of that finding it difficult to find short-term finance."

Private equity chief Jon Moulton, managing partner of the firm Alchemy, yesterday told the Commons Treasury select committee that £20 billion of loans may not be sufficient. He said: "I would personally be happy if the scheme was a lot larger – it offends many of my basic principles but we are in a bad hole and we need to get out of that hole."

But Richard Lambert, director-general of the CBI, said credit guarantees were "the first step we should take and then see how things go".

David Frost, director-general of the British Chambers of Commerce, said: "A government promise to guarantee individual loans to businesses is not only sensible, it's crucial."

But Liberal Democrat Treasury spokesman Vince Cable said: "The government should stop messing around with stunts and wheezes and ensure that the banks owned or part-owned by taxpayers operate as state banks, maintaining lending for the economy."