Brown Guarantees U.K. Loans in New Effort to Counter Recession

By Mark Deen and Rob Hutton

Jan. 14 (Bloomberg) -- U.K. Prime Minister Gordon Brown pledged to guarantee 21.3 billion pounds ($31 billion) of loans to companies, as European leaders acknowledged the failure of bank bailouts and spending plans to contain the recession.

Brown’s plan, coming the day after German Chancellor Angela Merkel announced a similar 100 billion-euro ($133 billion) fund, underscores the urgency of reviving credit to limit unemployment and sustain consumer spending.

“What governments in Europe are learning is that you have to take action, because if you allow the market to take its course, the consequences could be quite dire,” said Peter Dixon, an economist at Commerzbank AG in London. “This is the mood we’re in at the moment, to absorb huge amounts of bad liabilities in the private sector onto the public-sector balance sheet.”

Spending and tax cuts alone won’t be enough to spur economies as bank writedowns worldwide approach $1 trillion, Federal Reserve Chairman Ben Bernanke said yesterday in London. With the U.K.’s benchmark interest rate at its lowest since the 1694 founding of the Bank of England, Brown may be forced to take a direct role in monetary policy, via so-called “quantitative easing,” where authorities pump money into the economy by bolstering bank reserves.

“Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke said. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”

Facing Elections

Both Brown and Merkel, who are scheduled to meet tomorrow in Berlin, face elections within 18 months and the health of their economies will help determine their fate. German federal elections are scheduled for September while Brown must call a vote by June 2010.

Britain’s economy will contract in 2009 for the first time in almost two decades, and the euro region is confronting the first recession in its 10-year history.

Brown has already introduced a 50 billion-pound bank recapitalization program and taken over Royal Bank of Scotland Plc, extended 250 billion pounds of credit lines to banks and offered voters a 20 billion-pound package of mostly tax cuts.

“There is a sense people have been putting faith in Gordon Brown’s ability to manage the economy through the crisis,” said Andrew Cooper, a pollster at Populus Ltd. in London. “If he can’t deliver, the position he has set up for himself with voters collapses.”

U.K. Guarantees

Under today’s U.K. plan, companies with sales of up to 500 million pounds qualify for the guarantees, while a second tranche of 1.3 billion pounds was set aside for firms with sales of 25 million pounds or less. U.K. Business Secretary Peter Mandelson told journalists the government will take on the risk for half the funds, with retail banks providing the rest.

“Companies are the lifeblood of the economy and it is crucial that government acts now to provide real help to support them through the downturn,” Mandelson said.

The government is also exploring a separate plan for larger companies that are able to issue their own bonds, Business Minister Shriti Vadera told reporters.

Companies including Woolworths Group Plc and MFI Retail Ltd. have tipped into bankruptcy as credit dried up, and business lobby groups have said Brown must act quickly to prevent the recession from deepening.

The government will also make available 75 million pounds, 50 million pounds of which it will provide directly, to take equity stakes in small companies that have too much debt.

‘Borrowed Time’

The Confederation of British Industry said today’s program will help some companies but do nothing for the biggest firms, which must refinance more than 100 billion pounds of credit facilities this year.

“The scale of the problem goes well beyond what the government has announced today,” said Richard Lambert, director of the CBI. “The sense of living on borrowed time is palpable.”

In Germany, Merkel and her coalition partners yesterday announced the 100 billion-euro “protective umbrella” for non- financial companies to guarantee loans along with a 50 billion euro stimulus package.

Merkel’s government in October pledged 400 billion euros in loan guarantees, provided as much as 80 billion euros to recapitalize banks and set aside 20 billion euros to cover potential losses from loans.

Yesterday’s package plus steps passed in November bring Germany’s fiscal stimulus to 80.3 billion euros over two years, the Finance Ministry said. At about 1.6 percent of gross domestic product, that’s the biggest stimulus program in Europe, underscoring Merkel’s election-year shift away from a focus on eliminating the budget deficit.

Merkel said sound companies hit by the credit squeeze may seek government guarantees for loans. The guarantees may be handed out by state-controlled lender KfW Group.

“We have to make sure the market is functioning again, we have to provide assistance, Merkel told lawmakers today. Companies “that would be able to get loans without problems in normal times” will be eligible.

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net; Robert Hutton in London at rhutton1@bloomberg.net