Chancellor’s package of measures ‘isn’t enough’ – AJ Bell

The emergency package of measures announced by the Chancellor last night have not yet done enough to supply debt relief to businesses or mortgage borrowers, according to AJ Bell.

The investment platform suggested Rishi Sunak’s “whatever it takes” package will provide measures to help with cashflow, designed to contain the impact of the coronavirus outbreak on the economy.

However, AJ Bell also indicated the measures announced at last night’s coronavirus press conference would not fill the “production chasm” coming in the next few months.
AJ Bell chief investment officer, Kevin Doran, explained: “Overall, it’s a powerful package of cash flow measures that amount to assistance somewhere in the region of 15% of GDP, but what’s missing is any real help to fill in the production chasm that is coming our way over the next few months. If this is ‘whatever it takes’, I’m afraid ‘it just isn’t enough’.
“For the regular man on the street, the headline grabber will be the three-month payment holiday on mortgages. Whether the banks will continue to accrue interest on the outstanding balances isn’t clear yet.

“If it’s a simple payment holiday, then that’s pretty much what any bank would offer all customers in payment difficulty – nothing new here. If it’s debt relief, then that’s different and represents quite a hand-out to the public given that there’s £1.3trn of mortgage debt in the market earning the banks an estimated £6.5bn of interest every quarter.
“For businesses, there’s the offer of tax breaks, grants and access to £330bn of low-cost loans with a 6 month interest free period. Again, there’s a need to see details here, but it’s best thought of as giving interest free loans to corporates to cover cash flow issues during the lock-down.”

The investment platform also suggested that by its own calculations, the total interest received by the banks on their loan books currently amounts to approximately £28bn per quarter.

AJ Bell suggested that wiping out the interest on those loans for six months would shave £56bn from the bank’s profit and loss, tipping the entire sector into the red for the year, but would amount to just 3% of all loans outstanding, and just over 12% of the bank’s risk capital. As a percentage of GDP, this would be a giveaway of around 3%, AJ Bell added.
Doran continued: “Why households are possibly receiving relief and corporations are getting low-cost loans is probably as much a function of politics as it is economics, but if the Chancellor was serious about being brave and bold and all those other adjectives he tossed about, the smart thing to do would be to give genuine debt relief to both businesses and households, with interest written off on debts for the entire six month period.

“And whilst you’re at it, extend the holiday to all forms of consumer debt. Secured and unsecured. If you’re going to do ‘whatever it takes’, make sure that it’s big, simple, effective and powerful.”

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