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Further memorandum from Odey Asset ManagementAction on Troubled Debts and how to Kick-start Corporate Lending
We judge there is a significant opportunity for government to restart the credit flows throughthe financial and real economy of the UK, to make that happen fast, to ensure fair value fortax payers, and to do this with an exit strategy in mind.We recommend
a two-stage package of UK government intervention
:
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a national bank for troubled debts or government guarantee scheme
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active intervention to kick-start corporate debt markets
… other interventions will be necessary as the crisis progresses and should be coordinatedwith this package. Without this scheme as a foundation, existing and future measures look likely to fail.
We also offer a comment and proposals on HM Treasury’s latest guidance on theproposed asset protection scheme to deal with bad debts (page 3).Key arguments:
- a recent IMF working paper* showed that 60% of all global banking crises in the last30yrs (42 crises in total) were ended by a bad bank or troubled debt guarantee structure. Thisstructure is missing from the policy response in the UK today.- the buyer of last resort approach for company debt is analogous to the US TALFintervention scheme. The TALF provides evidence that this approach delivers significantpositive effects for the wider economy and population.- international experience provides elements of successful road-maps for implementingthe proposals.- these measures would not hand UK banks a ‘free lunch’. It will ensure that solventUK banks remain in private sector control.- the two building block measures will work best when accompanied by other sensiblepolicy measures including credit guarantee schemes, and the much needed flexing orsuspension of those Basle 2 rules which have a pro-cyclical impact.- there is no reason for government to make a loss over the life of the project.
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