How bad is Labour's credit crunch?

By Iain Watson
Political correspondent, BBC News

The government often blames its current woes on the global credit crunch - but Labour is facing a credit crunch rather closer to home.

Before the 2005 election, Labour approached wealthy backers to lend money rather than donate because, with their popularity not quite reaching the dizzy pre-Iraq levels, they felt it was more realistic to ask for a helping hand rather than a straight hand out.

Mr Brown has been having a tough time after a year in office

Within the next year, some of those loans - from £500,000 upwards - need to be paid off.

Some lenders are not feeling quite so generous after the long-running cash-for-honours saga and the allegation that peerages may have been on offer in return for loans.

And with the party heading south in the polls, recent days have seen some lurid headlines suggesting lenders were turning on the prime minister.

But many of those cited have not been donating to Labour for quite some time - certainly since well before Gordon Brown took the top job.

Labour's chief fundraiser - appointed by Gordon Brown - is no longer Lord Levy but the former lobbyist Jon Mendelsohn.

Traumatised

He has been concentrating his efforts in recent weeks on asking existing lenders to reschedule loans - as well as searching for new sources of finance.

And, despite what you might read in the press, his efforts have not been a complete washout. Labour remains financially afloat, if only just.

Over the past few days I managed to contact about a third of the biggest lenders to Labour, or their spokespeople.

These conversations revealed how difficult a task Mr Mendelsohn has.

While Labour is far from bankrupt on a day-to-day basis, the party might be hard pressed to contest a hard-fought general election.

One lender apparently felt so traumatised by the adverse publicity surrounding the cash-for-honours allegations that he says he will never put himself in that position again.

A £1m-plus lender would not say "never again" to one of his former favourite causes - but he said he just felt the time was not right.

Another big lender indicated he could become a big spender in the future but Labour's fundraisers had failed to ask him for a donation.

There was one big financial backer who was unequivocal. He would be happy to reschedule his loan and would remain "a friend of Labour" even though the party had "hit a rough patch".

Election funding

But welcome as that support is, Labour has two big worries.

The first is that they are now more dependent on the unions for finance than at any time since the New Labour project was forged more than a decade ago. Opponents suggest there is no finance without favours.

Trade unionists themselves are more sceptical, with Labour's former treasurer - and trade union official - Baroness Prosser telling me "pigs would fly" the day the government met trade union demands.

But she also felt it was unhelpful for Labour to be so dependent on the unions and urged Gordon Brown to go out and schmooze the big lenders personally.

And the second big concern is that, while Labour is far from bankrupt on a day-to-day basis, the party might be hard pressed to contest a hard-fought general election.

Not only is Labour finding money harder to come by - but it is flowing into Conservative coffers as they surge ahead in the polls.

In other words the picture for Labour's finances might not be as bleak as some may paint it - but it looks serious enough to raise the prospect of an electoral crunch.