Sat Sep 22, 2007
AS NORTHERN Rock faces a crisis in both credit and consumer confidence, the stage could be set for small businesses to face their own cash flow crises.
As banks become more cautious over who they loan money to, Bucks' SMEs may well be finding themselves struggling to find vital funds.
Both Chiltern District and Buckinghamshire County Councils have multi-million pound amounts invested in Northern Rock, although both say they have no concerns about the money now that the Government has guaranteed their investments.
But the Thames Valley Chamber of Commerce expressed concern that the financial fiasco could impact on SMEs in the area. Claire Prosser, policy executive, said: "It is understandable that many banks have become cautious of whom they lend money to. The increase in inter-bank rates could make vital credit costlier and less easily available, which is particularly dangerous for small firms.
"Many members of the Thames Valley Chamber of Commerce Group are SMEs, who may find it more and more difficult to access the cash-flow their companies need to survive. The credulous and trusting relationship once enjoyed by small businesses and their local bank managers may come under pressure; without major assets with which to secure loans, lenders across the board will be more cautious of how much they lend and to whom they lend it to."
She also believes that the Bank of England's Monetary Policy Committee needed to take further steps to improve the situation. She said: "Given the worsening dangers facing the economy, we strongly urge the MPC to consider further urgent steps to ease monetary conditions. Unless inter-bank rates fall markedly, a quarter point cut in Bank Rate would still leave monetary conditions tighter than they were before the current crisis started."
Paul Goodman, Wycombe MP, believes the Government has taken the correct steps, but acted too late. He said: "I think the Government were right to guarantee Northern Rock's savings. That said they should never have got in this mess in the first place. The Government basically gave signals they would not intervene and they did. We had this fatal combination of talking hard and acting soft, and that is a very dangerous signal to send to the financial world, and householders and savers."
He also believes that Gordon Brown's handling of the economy as a whole raises serious questions. He said: "They are very heavily in debt and effectively they have sent a signal over the last ten years or so that it is okay to borrow massively and by borrowing massively as a Government and individual, crisis results."
Other banks, including Alliance and Leicester and Bradford & Bingley saw their share prices dip on Monday, but they have been quick to distance their business models from that of Northern Rock.
The fifth largest mortgage lender in the UK, Northern Rock built its operation upon the mortgage business itself, whereas most banks raise funds through their customers making deposits. The credit crunch crisis arrived as a result of the so-called "sub prime loans", where investors in loans to US homebuyers with poor credit histories have been stung by losses, prompting widespread fears among lenders.
But experts believe there is little chance of Northern Rock actually going out of business, although speculation has spread that the stricken Northern Rock will be sold off at a discount, again sending share prices down.
On Wednesday the Bank of England said it will inject £10bn into the money markets in an attempt to bring three-month inter-bank interest rates down - a u-turn move that has prompted criticism, after it had previously refused to intervene in risky, longer term lending.
Source: http://www.thisisbucks.co.uk/news/
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