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Law360, London (April 9, 2020, 10:32 AM BST ) The Bank of England said Thursday that it will lend money directly to the government as it hopes to prevent a surge in state borrowing to offset the economic costs of the COVID-19 pandemic.
The central bank said that it has temporarily extended the government's so-called Ways and Means overdraft facility so that it can avoid being obliged to raise money through the bond market as it pays for the response to the coronavirus crisis. The loan arrangement, which allows the BoE to advance cash to the government, usually has a balance of around £400 million ($492 million).
The deal, struck between HM Treasury and the BoE, will be "temporary and short term" and will provide the government with extra liquidity to ensure that markets function through the disruption caused by the coronavirus. Lockdown measures imposed in March, which have brought much of Britain to a standstill, look likely to be extended further into April.
"As well as temporarily smoothing government cash flows, the W&M facility supports market function by minimizing the immediate impact of raising additional funding in gilt and sterling money markets," the BoE said in a statement on Thursday.
The last time the government tapped the facility was during the financial crisis, when it withdrew £19.9 billion to fill holes in the budget opened by plans to rescue the struggling banking sector.
The central bank said that the government will continue to use the financial markets as its primary source of financing as it responds to the crisis. The state will repay any money taken out from the BoE overdraft as soon as possible before the end of the year.
The government's overdraft drawings stood at £400 million on April 8, the BoE said Thursday. The outstanding balance is published by 10am every Monday.
The government has set out costly measures to keep businesses afloat during the crisis.
Chancellor Rishi Sunak announced the program on March 17 to allow the government to underwrite loans of up to £5 million to companies struggling during the shutdown, which was expanded this month to all viable small and midsized businesses that have faced financial difficulty during the COVID-19 pandemic.
The central bank has already set out measures to help the market during the outbreak. The BoE in March said that it is canceling its annual stress test of U.K. lenders and delaying consultations on climate risk and open-ended funds to allow banks to concentrate on weathering the storm created by the spread of COVID-19.
The central bank has also temporarily removed a capital buffer for banks for at least 12 months to release £190 million into the economy.
--Editing by Ed Harris.
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