There is confusion over George Osborne’s new plan to unlock funds for small firms

MERLIN HAS failed to weave its magic so now the British government is pinning its hopes on a new strategy of “credit easing” to unlock funds for Britain’s cash-strapped small and medium-sized businesses.

But what exactly is this latest plan – and will it be any more successful than the coalition’s last wizard wheeze?

British chancellor George Osborne used his speech at the Conservative Party’s conference in Manchester this week to unveil his new solution to the shortage of funds that are holding back investment by the nation’s small companies – investment the government hopes can haul Britain back from the edge of another recession.

In switching the focus to credit easing, Osborne has effectively admitted that the old plan – Merlin – has been a dismal failure.

Under Project Merlin, launched in February, the big banks agreed they would turn on the lending taps to small businesses and individuals, and would also show some restraint on pay and bonuses. In return, the crackdown on the industry would be less severe than initially proposed, certainly less harsh than the wider public was demanding.

Almost nine months later, it is clear that the banks have not stuck to their side of the bargain.

They argue the demand is simply not there, although that could have something to do with the rates they charge and the conditions they impose. Either way, the end result is that Britain’s small businesses are even more desperate for cash.

Hence credit easing, which, according to Osborne, will succeed in plugging the gap. And, should the euro-zone debt crisis deepen, the policy could be stepped up as an emergency measure to keep growth going.

But what exactly does it involve and how will it work? There was widespread confusion when the chancellor unveiled the scheme on Monday, not least among Osborne’s own team at the treasury, who struggled to explain the details.

In what is rapidly becoming a YouTube classic, British treasury minister Justine Greening squirmed under aggressive questioning from political commentator and former Sunday Times editor Andrew Neil. By the end of the 10-minute interview, it’s clear she had only a sketchy idea of what it involved and how it might be implemented.

Full details were promised in the chancellor’s autumn statement on November 29th, but here’s what we know so far: the government will buy up corporate bonds in a programme that could ultimately run into tens of billions of pounds, easing credit for small and medium-sized businesses.

At the moment, the market for bonds in smaller UK companies is tiny, making it virtually impossible for businesses to raise money in this manner. But the suggestion is that these debts could be packaged together and securitised by the banks, making them more marketable, prior to being bought up either by the Bank of England or a new arms- length body. The treasury may also guarantee some bank lending.

The problem with this slicing and dicing of debt is that, to many of us, it sounds alarmingly like the subprime mortgage securitisation that got the global financial system into this mess in the first place. Who decides which companies qualify? And what risk are the banks taking?

When Project Merlin was announced, the government was accused of throwing in the towel on bankers’ bonuses. Now it seems it is also throwing in the towel on bank lending targets.

The government insists that the bond purchases and any loan guarantees will not increase public borrowing because they will not appear on the books unless they result in a loss. If there is a loss, however, it will ultimately land, yet again, on the taxpayer rather than the banks.

Osborne also used his speech to the party faithful to make clear his support for another bout of quantitative easing – printing money – from the Bank of England.

The bank’s monetary policy committee begins its two-day meeting today and there is a chance it will unveil another £50 billion (€58 billion) of quantitative easing tomorrow, on top of the existing £200 billion programme.

Some economists expect the bank to wait until November, however, when third-quarter growth figures will be available.

Which takes us back to that now notorious Greening interview. Neil brought it to a merciful conclusion with a “pop quiz question” for the treasury minister. “Who,” he asked her, “said in January 2009 ‘printing money is the last resort of desperate governments when all other policies have failed’?”

It was the one question the unfortunate Greening did know the answer to. It was, of course, her boss, George Osborne.

Fiona Walsh writes for the Guardiannewspaper in London