Debt ‘out of control’ at British firms, says Xavier Rolet

A top business chief last night sounded the alarm over Britain’s mounting corporate debt pile – just as the Government extends emergency bank loans for struggling firms. 

Xavier Rolet, former boss of the London Stock Exchange, warned that companies in the UK and other nations are now ‘so awash with debt that central banks simply can’t control it’. 

The debt binge by firms now poses a major risk to long-term economic recovery, Rolet said. 

Warning: Top business chief Xavier Rolet is a former boss of the London Stock Exchange

The highly-respected City grandee warned the problem was so severe that Ministers would next year come under pressure to consider debt cancellation programmes. 

He predicted ‘big social debate about the cancellation of debt’, comparing it with discussions around debt ‘forgiveness’ in the Roman Empire in the 1st Century BC. 

‘There’s so much debt that if you raise rates, you’re essentially killing the whole economy,’ Rolet told The Mail on Sunday. 

‘The only way you can remove the burden is to make the political decision to cancel some of that [debt].’ 

He said governments would have to cancel their own debts and that of individuals first, before turning to company loans – or it would be politically taboo. 

‘It’s going to be very difficult for any government to tell their taxpayers they should essentially support the cancellation of debt of companies that have borrowed in order to increase their profits,’ he added. 

Industry group TheCityUK estimates the total amount of ‘unsustainable’ debt taken on by British businesses at around £70billion – or about 6 per cent of the total borrowed by firms. 

Half of the UK’s problem debt pile is expected to hit small businesses that employ fewer than 250 people, TheCityUK said. Rolet’s warnings come after Chancellor Rishi Sunak last week extended his £68billion emergency loan schemes for businesses until the end of March. The furlough scheme, to help employers pay wages, has been extended to the end of April. 

The extension was announced amid growing fears that more parts of the UK could be hit by tougher pandemic restrictions after Christmas – possibly even another national lockdown. 

Many firms risk being saddled with loans they will never be able to repay and Rolet warned that borrowing from banks is ‘absolutely the worst way’ to grow small businesses. 

Around £43.5billion has been dished out under the bounce back loan scheme, which allows small businesses to borrow up to £50,000, underwritten by the taxpayer. 

One banking analyst told The Mail on Sunday that he estimated the scheme could reach close to £70billion of loans. Based on evidence published by the National Audit Office spending watchdog, he estimated £40billion could be lost to fraud and defaults. Taxpayers would be on the hook for the bill. 

Rolet – a former Goldman Sachs trader – was named as one of the top 100 chief executives in the world in 2017 by the Harvard Business Review after a hugely successful eight-year stint running the London Stock Exchange. He predicted that many businesses will be forced to keep rolling over their debts over the next few years, making it tough to raise funds to grow. 

Rolet said: ‘If the economy recovers, do you see central banks increasing rates? It’s not going to happen. So there’s no potential for either inflation or rates to pick up in the short term. 

‘Central banks are essentially impotent to change that trend. There is no central banker today who is going to call for an increase in rates any time soon. 

‘So the debate that is starting to emerge is a very active and growing debate over debt cancellation. This is not the first time in history this has happened. If you look at the Roman Empire, you had the same dynamics… a big social debate about the cancellation of debt.

Rolet said the UK’s tax regime and approach to regulation had left companies reliant on banks. About 80 per cent of business funding in the UK is bank debt, while just 20 per cent is equity raised on the stock market or through wealthy investors. 

Rolet believes the UK should make it more attractive for investors to take equity stakes in small businesses, as is typical in the US, lessening the need for loans. 

One fund manager last night warned that the UK’s growing company debt mountain would make it harder for big firms to pay dividends to shareholders. ‘Our view for some time has been that, with corporate debt at well over two times pre-crisis levels… dividend payments had to come under pressure,’ the manager said. 

Richard Peberdy, a partner at KPMG, said the level of unsustainable debt is a ‘massive’ issue for the economy, at a time when businesses face other challenges. ‘This is not the sort of base that we hoped to spring into post-Brexit,’ he added.