Greensill P2 | Credit Crunch economics

The Greensill scandal isn’t going away with further revelations about lobbying and inquiries.

There are still some big questions that stick in my mind; What was Greensill’s actual business? How did they plan to make money?

Warning: Contains full frontal accountancy

Greensill liked to describe themselves as a fin-tech company, but their business model was essentially invoice financing. This is a perfectly normal and acceptable aspect of commercial finance; a business has lots of money owed to them, so they use invoice financing to access that cash earlier and improve their cash flow.

If you can reduce the length of time it takes to collect money owed to you, and increase the length of time you take to pay your creditors you can make the balance sheet of the business, and it’s profitability, look a lot better.

So far, so legitimate.

Things get more complex when a company uses reverse factoring. Rather than use invoice finance for receivables they use it to finance purchases from suppliers, allowing them to push their time to pay out without bankrupting their supply chain. Supply chain finance is essentially a combination of traditional invoice financing and reverse factoring.

All of this finance and factoring is essentially debt, however businesses can hide this debt in their accounts among receivables or other payables. This is what did for Carillion. Officially they only had £219m of debt on their books, but hidden among their “other payables” was nearly half a billion of additional borrowing.

How widespread this practice is, and how dangerous it is to corporate health is unknown. We know that big companies like Vodafone and AstraZeneca use it, but we don’t know if they have hidden debt like Carillion.

Right now about 1/3rd of NHS Trusts are running a deficit, down from a peak of 2/3rds in 15/15. The annual deficit across Trusts is just under £1bn. At the end of the 19/20 financial year accumulated debt was £13.5bn.

Department of Health has a target to reduce the debt and deficit to zero over the next 3 years.

It is easy to see why Greensill would look at these numbers and see a lucrative market for supply chain financing in the NHS. Nor is it hard to see why Department of Health would be attracted to a mechanism that would move this debt off the balance sheet Carillion style.

If all of these accounting practices, off balance sheet debt and hidden borrowing sounds familiar – you are right. This is exactly what was going on in the run up to the credit crunch.

But there was a second part to Greensill’s business model.

As well as providing supply chain finance to businesses they parcelled up this debt and sold it to investors, chief of which was Credit Suisse, which held $10bn of these assets.

This is exactly what banks were doing with US mortgage debt, which was the direct cause of the credit crunch. And just like in the credit crunch it is impossible to correctly value this debt because no-one knows which companies have hidden borrowing through supply chain finance. Greensill could only sell these debt packages if they had insurance; when their insurer, Tokio Marine, pulled out, they went under. In the language of the credit crunch these collateralised debt obligations were only saleable if they had credit default insurance.

The immediate consequence is that companies like GFG steel who used Greensill for factoring are now in massive trouble. How many other businesses are in trouble is unknown, because no-one knows who has hidden debt related to supply chain financing.

All of these business practices are too close to the credit crunch for any sensible person to be comfortable with

The question is – were Ministers too dim to know what they were dealing with? Or they did know and didn’t care? They must have known that Greensill were in trouble a year ago or why else would they be touching Rishi Sunak for loans? Or maybe they know that corporate behaviour like this is a problem, but it is someone else’s problem, not theirs.

The behaviour of Ministers makes me worry that we are closer to the next financial crisis than the last. And this time it will start in the UK, not the US mid-west housing market.,’%20(see%20Figure%201).

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