Britain aims to grease lending with billions in guarantees

Amid near-daily indications of a crumbling economy, the British government Wednesday announced new initiatives to clear blocked lending channels. The effort targets small and midsize companies that officials worry are being starved of credit by risk-shy banks.

"Companies are struggling to secure the finance they need, not because of any failure in their business but due to the tougher credit conditions," says Peter Mandelson, the government's secretary of business.

The government said it will provide guarantees that will lead to lending of 21.3 billion pounds (about $31 billion) for small and midsize firms. Most of the money will protect working capital credit lines for companies with annual sales below about $730 million. A pair of more limited moves are targeted at smaller firms. The three-pronged effort, under discussion since November, drew mixed reviews.

Analysts called it a positive step, but said far more ambitious actions will be needed in the months ahead. "It's kind of a piecemeal policy. More is needed," says Alan Clarke, an economist with BNP Paribas.

Each day brings fresh signs that the U.K. economy is continuing to contract. Barclays Bank on Wednesday announced plans to cut 2,100 jobs, the latest in a blizzard of pink slips. BNP Paribas expects the U.K. economy to shrink by 3% this year.

A lack of credit is at the root of the widespread weakness. Even sound businesses find it difficult to get financing. Fixing the nation's banks is so essential, some say radical steps are inescapable.

"We may well, before this is over, see fairly comprehensive state ownership of the banks," says Willem Buiter, a former member of the Bank of England's monetary policy committee.

Though state-owned industry once was a central feature of the postwar British economy, the country's banks always have been in private hands. Last fall, as the global financial crisis worsened, the government took major stakes in several banks in return for about $54 billion of fresh capital. Royal Bank of Scotland is now 58% government-owned.

Still, full nationalization would be controversial, both here and in the U.S., where Buiter says equally troubled banks will require the same treatment. Fed Chairman Ben Bernanke's statement that U.S. banks — even after the injection of hundreds of billions of dollars in government cash last year — require additional capital "is an admission of that," he says.

Others hope the government can restore normal credit operations short of drastic measures. "All around the world, what we're trying to do is get credit flowing again," says Alan Brown of Schroder Investment Management. "Hopefully (this is) another useful step."

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