Brown promises £250bn bailout will save SMEs

Downing St has put SMEs at the centre of its bank bailout plan, but is relying on European funds and the banks' own word to deliver much needed relief to small business.

Chancellor Alistair Darling's £500bn bailout for the banks has been swiftly followed by action from the Bank of England, which has announced an immediate half per cent cut in interest rates, alongside identical cuts from the European Bank and the US Federal Reserve.

Prime minister Gordon Brown, speaking to the Commons today, refused to make a prediction on what will happen to the UK economy in the coming year, but said the introduction of £200bn in extra liquidity, £50bn in recapitalisation of the banks and medium-term financing of £250bn would help.

Brown said the government aimed to improve cashflow and credit availability for small and medium businesses. He promised the government would aim to settle its own payments to small and medium businesses which supply the government within ten days.

He is also proposing talking to the European Investment Bank to increase the availability of loans to small and medium businesses made through UK banks.

However, the mechanics of the plan remain a mystery. So far, all that is certain is the government has had a word with the UK's leading banks.

The Treasury believes there is no need for Parliamentary legislation for the multi-billion bailout to go ahead. The figure of £250bn in financing is thought to be a fluid one, essentially plucked from the air and liable to change as the situation changes.

The official Treasury statement said that any capital investment in banks, "will require a full commitment to support lending to small businesses and home buyers".

But no details have been provided on how this would be achieved - it will not be a question of quotas or targets. While having government officials on bank boards is not envisaged, it has not been ruled out.

Discussions with leading banks have apparently reassured officials that the money will be used to increase availability of loans for small businesses and mortgage applicants.

Success or failure of the bailout will be measured in a loosening of credit for business. Brown's political future is likely also to depend on whether the effect trickles down to the real world.

The FTSE recovered some its earlier losses on Brown's statement but was still down one per cent. Reaction on bank stocks was mixed - HBOS jumped almost 60 per cent while Barclays was up two per cent, and Alliance and Leicester slipped two per cent. ®