Should Osborne borrow for 100 years?
- 14 March 2012
- From the section Business
Is it sensible long-term planning or hubris?
That is the question being asked in the City about the chancellor's decision to explore whether he can and should issue gilts - or borrow - with a maturity date of 100 years or perhaps no maturity date at all.
The argument for doing so is that there would be a reduction in the amount of debt that needs to be refinanced in the short term.
The argument against is that there may be few or no natural buyers for the bonds - which could leave George Osborne with egg on his face, unable to sell the bonds at an acceptable price.
It is the unenviable task of the Debt Management Office, the agency that manages the nation's debt, to sound out investors and report back to the chancellor on whether what the FT has christened Osborne Bonds will fly.
Some would say that given that the chancellor is able to borrow at maturities of up to 50 years at record low interest rates, he should count his blessings and pocket the billions of pounds of cheap cash from conventional sales.
There is perhaps a more fundamental point, made this morning by Jonathan Portes of the National Institute of Economic and Social Research - which is that one of the main reasons the government can borrow more cheaply than for a century is that the economy is so weak that investors expect interest rates to remain incredibly low for years.
Portes argues that it would be good news for most of us if the interest rate paid by the government were to rise, because that would show economic growth is reviving - and the need for the Bank of England to force rates down by creating tens of billions of pounds of new money, via quantitative easing, would be over.
Even so, as taxpayers we should probably be grateful that gilt yields - the implicit interest rate paid by the government - are so low at the moment. It means there's more of our tax money available to fund squeezed public services.
When the government borrows for five years, for example, it is getting better than free money: investors are paying for the privilege of lending to George Osborne, because the yield is only a tiny bit over 1% at a time when inflation is a multiple of that.
But back to the 100-year or perpetual bonds.
Now believe it or not, there are eight existing perpetual gilts still in existence - worth collectively a bit over £2bn. The oldest dates from 1853; and the biggest extant issue is £1.9bn taken out to finance the World War I and restructured in 1932 (there are some gilt obsessives who argue that the UK effectively defaulted in this restructuring!).
The liquidity and trading in those older issues is so tiny that it doesn't give much guidance as to the potential cost for the government of borrowing substantial sums at what are known as ultra long maturities - but for what it's worth the 1932 war loan pays an implicit interest rate of 3.9% at its current price.
That is quite a lot more than the 3.2% which the government currently has to pay to borrow for 50 years, the current longest maturity (by the way, there is currently £25bn extant of 50 year gilts, in conventional and inflation protected or index-linked form, which is a fraction of the more than trillion pounds of gilts in issue).
So the question is how much extra interest would it be worthwhile for the government to pay to borrow for even longer?
Would it be worth paying 4% as a kind of stunt, to show the world quite how credit worthy the British government is perceived to be?
That's a judgement for the chancellor.
But here is the thing: there are few obvious natural buyers for 100-year or perpetual bonds. The main purchasers of long-term debt are final-salary pension schemes and life companies.
But both venerable British savings institutions are in the decline in the UK. There are some who believe that most defined benefit schemes will be wound up within half a century, so they're unlikely to be buyers of debt that will outlive them. And, as I pointed out yesterday, the Pru fears that Brussels is out to muller British life insurance.
So maybe there's value for the chancellor in advertising to the world that he could if he wanted borrow with no fixed repayment date, such is the stability of British democracy and the UK's record of paying its debts.
But just possibly he'll charged so much for the privilege of doing so that he'll regard it as a prohibitively expensive publicity stunt.