£35bn of crisis debt threatens 3m jobs, City report says

As many as 3m British jobs and 780,000 businesses are at risk unless support is provided for borrowers of £35bn of unsustainable debt built up during the Covid-19 crisis, the UK's financial industry warned.

TheCityUK said £35bn of unsustainable debt was covered by government guarantees for loans to small and medium enterprises (SMEs). About three-quarters of the unmanageable borrowing is by businesses outside London, requiring an urgent national response, TheCityUK said in a report drawn up in consultation with the Treasury and the Bank of England.

The financial lobby group called on the government to set up a UK Recovery Corporation (UKRC) to issue, hold and manage unsustainable debt backed by the government. The radical move would help SMEs get their debts onto manageable terms and encourage the private sector to invest.

Smaller SMEs could pay back unmanageable loans through tax and larger businesses could convert loans into preference shares or long-term subordinated debt, the report said.

The government would be the main investor at the outset, as it was when 3i was created after the second world war, but private capital could buy securitised assets or buy tranches of debt or equity to boost SME investment over the long term, the report said.

The report also called for a growth capital fund to provide businesses that are not struggling with debt with capital and help drive economic recovery. The growth capital would support regeneration of local and regional economies, TheCityUK said.

Urgent action is needed because businesses have to start repaying government Covid-19 loans in March but many will come under great pressure before then as the Treasury reduces support such as the furlough scheme, the report said. In total about £100bn of unsustainable debt is due by March 2021.

Adrian Montague, who chairs TheCityUK's leadership council, said: "With tough trading conditions forecast to remain, paying back these loans will be challenging for many SMEs. To secure a strong recovery, action must be taken now to help them sustainably retrench, rebuild and return to growth … Failure to act decisively now will condemn many SMEs and communities across the nation to default and decline."

The plan was drawn up with contributions from more than 200 financial experts from 50 financial and professional services firms overseen by accountants Ernst & Young. It builds on early recommendations published in June.

The UK government has put in place programmes to support businesses hit by the Covid-19 lockdown and resulting recession in an attempt to stop otherwise viable enterprises going bust. These range from backing bank loans of up to £200m to large companies to so-called bounceback loans with a maximum value of £50,000 for smaller enterprises.