From Italy to Japan there is a host of evidence that state-controlled banks come under pressure to direct loans to favoured constituencies and to keep uncompetitive companies alive with subsidised credit (see article).
But the government has shied away from the political fight that would be needed to change the rules.Subsidised loans to favoured businesses by the country's development bank, BNDES, are another obstacle.
"The result", says Edward Pinto of the American Enterprise Institute, a think-tank, "will be risky lending for those least able to cope .The underlying problem with the new plan is that, like Fannie and Freddie before it, it tries to reconcile two conflicting goals: protecting the financial system and providing low-cost housing loans to favoured groups.
The coalition government was today seeking a compromise over plans to make higher earning graduates pay more for their degrees as a Tory minister confirmed that a variable interest rate on student loans was a favoured option.
Remortgaging or taking out a personal loan tend to be the favoured methods of funding an extension (for more detail, see our guide to financing home improvement).
So ordinary folk have ended up subsidising loans made by state banks to favoured state-run groups.Happily, this policy looks set to change, too.
The favoured approach was to tap rich supporters for loans that, thanks to a loophole in the law, did not have to be declared or the identity of the lenders revealed.
These set interest rates, and require around half of loans to go at subsidised rates to favoured purposes, such as farmers and housing.
Inefficient state-owned businesses are still greatly favoured, particularly by easier access to credit via the stockmarket or loans from state-owned banks.
Politically directed lending to favoured industries has continued as before, and the old, written-off bad loans were soon replaced by new ones.
