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Another Article from FT, in two parts, part 1:

For markets, 2022 will be the year of playing chicken. Inflation has raced higher in the past year, well beyond most central banks’ tolerance levels. So the time has come for policymakers to start withdrawing the stimulus that pushed asset prices up after the pandemic first hit, nearly two years ago. Some central banks have already started removing the support they pumped into the financial system. Among them is the Bank of England which, in December, surprised investors with its first interest rate rise in three years. And the most influential of them all — the US Federal Reserve — has started trimming asset purchases, as well as signalling that it will deliver three rate rises over the course of the year. Investors increasingly think the first could come as soon as March, and that three could be too conservative. The question is whether the Fed can do that without destabilising financial markets. Hence, the high-stakes test of nerves. Corporate earnings and economic growth of course matter to fund managers, but the direction of interest rates is the dominant issue across all asset classes. Policymakers shrugged off surging inflation for close to a year. Whether they will now get tough and stick with their intended rate rises should markets take fright is far from clear. Many investors doubt that policymakers will be brave enough to crank up the cost of borrowing in the face of any blow-ups in asset prices. Recommended News in-depthGlobal inflation Inflation tracker: latest figures as countries grapple with rising prices “Central banks can’t afford to be aggressive inflation fighters,” argues Salman Ahmed, global head of macro at Fidelity. “It’s not consistent with economic stability because of debt burdens.” The European Central Bank has some particularly sharp restrictions here, given that its monetary support of the bond market is so crucial to holding the euro currency area together. The Fed has more leeway due to the dollar’s central role as a global reserve currency but, even then, “there is a risk of endangering financial stability”, Ahmed adds. Public debt in the US stood at about 60 per cent of national output in 2007, Ahmed notes. Now, due in part to the massive fiscal largesse linked to the coronavirus pandemic, it is well over 100 per cent — which in turn means that a huge slice of predicted GDP growth could be erased by higher benchmark interest rates that raise debt servicing costs. “That’s the elephant in the room,” Ahmed says. “When inflation is below 2 per cent, you can justify being dovish.” In the US, it is now running at 7 per cent, taking that option away. Already, cryptocurrencies and some of the more speculative areas of stock markets have stumbled since the Fed showed more urgency in its shift to tighter policy, but the impact has not fanned out across markets more broadly.

Part 2 from Financial Times:

It was self certified and required no credit checks. Officials say the scheme was a success, given the urgent need to get cash to businesses struggling to survive in the first lockdown. At the time the Treasury was under pressure to act after early versions of the scheme were criticised for being too slow to help small businesses. With no interest payments for a year, the programme proved wildly popular with small businesses, with about a quarter of all UK companies applying for loans totalling almost £47bn. However, the cursory checks also made it a magnet for fraudsters. About £1.3bn, or 2 per cent of the scheme, has been defaulted on by borrowers unable to pay the money back. The taxpayer is facing total losses of up to £17bn from defaults, fraud and error. The predicted losses make the BBLS the most costly of the government’s Covid business support schemes. Fraud and errors in the furlough, self-employed income support and Eat Out to Help Out schemes total about £5.8bn. Of this, Viscount Younger of Leckie told peers on Tuesday, HMRC expected to recover between £1.3bn to £1.5bn. Charles Roxburgh, permanent secretary at HM Treasury, told the public accounts committee this month that officials knew “this would be an expensive scheme by its very design?.?.?.?we were aware of the fraud risk. Ministers were advised of that”. But he added: “Given that the other loan scheme wasn’t delivering money fast enough to small businesses, it was judged appropriate to go ahead.” Cases of BBLS fraud are starting to reach the courts. This month, a judge in Manchester called for a probe into how a drug dealer and car thief with 48 convictions was given a £50,000 loan. “The most basic of checks would have revealed the fraud,” he said. In a separate case a few days earlier, two men in Yorkshire were banned as directors after claiming £50,000 loans. In one instance, the insolvency service found that a company that claimed an annual turnover of £200,000 was actually making less than £700 a month. According to a Freedom of Information Act request published by the Insolvency Service this week, 9,733 companies that entered insolvency between May 2020 and October 2021 had taken out loans from the scheme. The British Business Bank said it had “ensured that key counter-fraud measures consistent with the self-certification design of the scheme were in place from the outset”. It added that £2.2bn of fraud had been prevented as a result. The Treasury said more than £100m had been invested in a taxpayer protection task force of nearly 1,300 staff, who were expected to recover an additional £1bn. But one Whitehall insider said there was likely to be fresh questions over whether more could be done. “Can we raise our efforts? Where are the weaknesses? There is a clear challenge here.”

From todays Financial Times:

UK banks fear their reputation could be unfairly tarnished over accusations that they handed out billions to fraudsters in a state-backed coronavirus business loan scheme. Lord Agnew, minister responsible for counter fraud in the Treasury and Cabinet Office, resigned in the House of Lords on Monday, saying he could no longer defend the government’s record on tackling fraud in the bounce back loan scheme, which was designed to save small businesses at risk from pandemic lockdowns. Agnew accused officials at Treasury, the Department for Business, Energy and Industrial Strategy and the British Business Bank of “woeful” oversight and “schoolboy errors” in the scheme. But his pointed criticism of the UK’s banks, which he accused of having taken about £1bn to cover defaulted loans under the fully guaranteed scheme, has sparked alarm in the industry. Senior bankers fear they are being scapegoated for a programme drawn up in haste by Treasury officials during the first Covid-19 lockdown in 2020. “I am beyond words. People were working every hour god sent to find solutions,” said one senior UK bank executive. “Hopefully common sense will prevail, but if it doesn’t I have literally told the Treasury and Financial Conduct Authority in meetings: ‘I hope nobody has a short memory around here folks, I have every meeting minuted’, recording everything the government said like ‘get these done, get these out, cut corners’, to protect myself.” A manager at a different lender said it had flagged the potential for a wave of fraud. “The government is starting to worry about the scheme now because at the end of the day they wrote this cheque, as we keep reminding them.” Another executive said banks were worried about the risk to their reputations after having spent the past decade recovering from complaints about how they treated small businesses in the 2008 financial crisis. Agnew on Monday claimed the BBLS had entered a “new and dangerous phase” because banks were able to claim cash from the state loan guarantees. He demanded the government stop paying out until there was “clarity” on what lenders were doing to tackle fraud. “An avalanche of claims on the 100 per cent state guarantee has already started,” he wrote in an FT op-ed. One senior banker rejected Agnew’s criticism, saying banks needed to meet a standard for fraud prevention in order to trigger the guarantee. The debate over the loan scheme continued in the House of Lords on Tuesday, with one peer asking again whether the guarantee should be revoked, while others questioned the scale of the fraud. Officials at the business department estimate that £4.9bn of BBLS funds could be lost, depending on the success of efforts to recover money from fraudsters. But the National Audit Office criticised attempts to prevent fraud as inadequate and under-resourced, and risked allowing smaller fraudsters falling through the net. The BBLS, launched in May 2020, guaranteed loans of up to £50,

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