There’s a lot of chatter about, not least in government circles, that banks are not lending to small and medium enterprises (SMEs) which are the main job creators in the British economy.

Banks are currently in an invidious position. They are being prodded to lend more, while simultaneously adding billions to their capital reserves. Non-expert ministers and MPs, such as Vince Cable, imagine that because a couple of banks received public money as a bailout, they are duty bound to risk yet more in a very uncertain marketplace.

What then are the facts for a bank like HSBC, one of the world’s largest:

So what are the facts? HSBC’s new small business lending was up 38 per cent in the first half; across all top banks and all small firms, the amount of new lending is down on 2009, at £520m per month, just enough to match repayments and defaults. Why? Demand for credit has dropped. Uncertainty means firms are trying to reduce their debt; small firms hold a record £56bn on deposit. HSBC’s corporate overdraft utilisation rate has fallen to 42 per cent, from 44 per cent: facilities are not being used. Rates are neither ultra-cheap nor extortionate: small corporate borrowers are not usually being priced out.

The supply of credit has also diminished. Banks have rightly become more realistic when assessing projects in a low-growth environment. Some lenders have quit the market. The remaining ones have been told to put more money aside (boosting capital), to shrink balance sheets, and to borrow less on the wholesale markets (a problem given that low saving rates have forced many banks to rely on money markets to fund new loans).

It’s not rocket science. Perhaps the Lib Dem contingent in the Coalition Government will have less to say on the matter in future.

Quote: Allister Heath, City AM

The UK Daily Telegraph is reporting that an unnamed rating agency is set to cut Britain’s credit rating following yesterday’s calamitous fall in bank shares and the government’s astonishing blank cheque for the banks.

Edmund Conway writes that this is only a whisper, but given the S&P reduction in Spain’s rating just days ago, it has the ring of truth.

Should it happen, it will put up the interest paid on “gilt-edged” government bonds, and filter through to almost every part of the economy.

Unlike Spain and Ireland, however, Britain has the advantage of a free-floating exchange rate that acts as a safety valve for the economy when times are tough. With interest rates approaching zero, more strings become available to pull, despite the apparent loss of monetary control.

However, the astonishing 96 percent fall in the share value of giant international lender, Royal Bank of Scotland — now 70 percent owned by the government — has led to some commentators calling the UK “Iceland on Thames”.

It would be a big blow to the fragile ego of Gordon Brown in particular. He knows that “his watch” has lasted 12 years and a catastrophe will destroy what little reputation he has left.

Should Brown be placed on suicide watch?

As the first wave of the credit crunch plays itself to a messy conclusion, we are almost certainly now into its second leg.

Collateralized debt obligations (CDOs) may have been the opening gambit, but credit default swaps (CDSs) are the new kids on the block.

George Soros estimates that the value of CDSs now equals half of the U.S.’s household wealth, an almost unimaginable number — let’s call it $23 trillion. So what are CDSs?

They are hedges made by investors in case a company defaults on its debts. In effect you bet on a company failing to protect your investment in the event it does just that.

The problem arises when large numbers of companies go bust and the CDSs themselves become worthless since no-one can pay them out.

A CDS seller undertakes to compensate a buyer if a corporate bond defaults. Since there is no limit to the size of cover taken out, the value of CDSs often exceeds a company’s debts.

Moreover, many CDSs are bought with borrowed money so the infection of the system drives deep into the financial heartland like veins in a blue cheese.

As defaults rise to unprecedented levels, so the whole ricketty system threatens to collapse.

Another nightmare to look forward to.

This article is adapted from a piece which appeared in Syntagma on February 27.

We’re talking about the American economy, of course — now in recession, as we’ve been predicting for months — and the British and European financial positions, which are trailing some way behind the U.S., but about to implode too.

We’ve been on the case since last June when the ominous tag “credit crunch” started to be bandied about in response to falling American house prices.

As online publishers we are partially protected from the ravages faced by bricks and mortar operations. Even so, Google responded to the same data last year by dumping lots of small publishers using its AdWords/AdSense programs and its range of offshoot partnerships.

The knock-on effects lowered the earning power of a whole raft of mid-sized publishers who operate below the glass ceiling of scalability needed to challenge the giant press barons of the print media.

Given the power of this pincer movement, how should internet marketers and publishers ride out the troubles ahead, which may even include another dotcom crash?

Here at Syntagma we are developing two new business models which don’t depend exclusively on Google rankings and big investment in assets. We have also moved to conserve cash, now the most sought after commodity in global financial markets. Forget equities, bonds and angel lending. Asset-backing is truly out of fashion. Only cash and gold will do during the next two to five years, or maybe even longer than that. Japan took more than a decade to haul itself out of its banking crisis and the profound deflation of the 1990s.

I really don’t see how mid-sized businesses, with heavy debt, and/or lots of equity in the hands of VCs, can get through this otherwise.

The Fed’s dramatic easing of monetary policy, which still has some way to go, is barely making an impact, although the usual lags apply. In the 1990s, Japan found that zero, even negative, interest rates could not persuade its reluctant public to splash out in the shops. Longer term rates in the U.S. are already close to zero.

Ben Bernanke is apparently studying the Japanese experience of zero rates right now. Surely a sign of what’s to come.

The game now appears to be out of the hands of the authorities whatever they decide to do. Bernanke deserves credit for at least trying. His next move will surely be to throw the kitchen sink at the problem and let the Devil take the hindmost. This is no time for musings on “moral hazard”, the hazard is not inflation but deflation and slump. Massive U.S. Government loans to individual defaulters can’t be ruled out and may be just around the corner.

Compare that to the lethargic approach of the Bank of England and the European Central Bank. Still holding rates at 5.25 percent and 4 percent respectively, although the BoE has little room to manoeuvre thanks to Gordon Brown’s obsession with public-sector spending.

The first casualties could be some major institutions in America and monetary union in Europe, where the euro currency is looking very vulnerable. At least Brown got that right.

Syntagma predicts we are going to be amazed by developments in the not too distant future. The world may look a very different place when we come out of this, and it won’t necessarily be all bad news. Bubbles have to burst. Nature demands it. And the end of the eurozone would be a big plus for European freedom.

Nearly a year ago I wrote a post called These are the good times. They were and still are, uncomfortable though the ride may be.