The Financial Times has noted that:
Retail investors are being prevented from investing in the UK corporate bond market because of the way the market is structured, according to a new report.
The Investment Management Association (IMA) has warned that investors find it difficult to understand the risks of different corporate bonds, because of the large number of bond issues and the complex way they interact.
It is also difficult to design and implement best execution rules that are “critical” for investor protection, the IMA said, because of the lack of transparency in the market.
This is a damning indictment of the City.
It is also a considerable obstacle to those of us who want to use bonds as the basis for rebuilding the green infrastructure of the UK, as suggested by the Green New Deal.
The fact is that almost all real investment in the UK is now financed by bonds, and almost none at all by share issues. And the fact is that both corporate shares and bonds remain unattractive precisely because business is so clueless about the future. After all, let’s face reality: no one needs new cars any more since oil is very obviously running out and there really are a limited number of electronic toys anyone needs. The need for investment is almost entirely in socially owned infrastructure because that is quite clearly what people are short of, in which case an effective retail bond market has to be established to let people buy the financial securities needed to fund that development.
Reform is needed, now. At least the IMA has recognised that.
Richard Murphy Bonds, Economics
The FT has reported that the quality of corproateb debt is at its lowest level for 25 years.
Hardly surprising, but it is yet another argument for Green Bonds - which would be used to provide real benefit for real people through investment in our collective futures, and for People’s Pensions.
Richard Murphy Bonds, Economics, Pensions
Bonds are on my agenda right now. In fact, approximately half my professional work is currently dedicated to their use in the public sector. So I was interested to note that the FT reported last Thursday that the introduction of International Financial Reporting Standards for UK government accounting next year will create a conundrum. This is because:
IFRS says that most PFI projects should be off-balance sheet for the private sector. The logical consequence is that the public sector should put PFI on the books: the alternative - assets floating in the ether, owned by nobody - is intolerable. The Treasury should embrace, not resist, such an interpretation.
I entirely agree. The current situation where some PFI is on the government balance sheet (e.g. some larger rail projects) and others (such as most hospitals and schools) are not is absurd and misstates the true financial obligations of the government. As the FT then notes though:
There will be consequences. First, as much as £30bn in off-balance sheet leases may be reclassified as borrowing, causing the government to break a self-imposed rule that limits public sector net debt to no more than 40 per cent of gross domestic product. But that, too, could be an opportunity: to replace increasingly discredited fiscal rules.
Again, that’s right. But the biggest consequence of all will be that the game of pretending debt is not an obligation will end, and in that case much of the reason for PFI will disappear. That has to be a good thing. Then risk can be transferred when it is appropriate, and by way of contractual obligations, and financing can be raised optimally and cheaply quite independent of that risk transfer, which has to be right for optimising both.
The time for bonds has arrived. Indeed, my colleagues in this work and I have dubbed this year Bond - 2007.
Richard Murphy Bonds
Will Hutton wrote a good piece in the Guardian on Monday on the obvious need for the use of bond finance to pay for the infrastructure development this country needs. I explored this here last week.
In his article Will Hutton said:
The heart of the problem is the Treasury’s attitude towards public debt and the way it calculates the payback from public infrastructure projects. In many ways, the Treasury has made significant strides; its work on poverty, the pre-budget report and the quality of analysis on the case for and against the entry into the euro were examples of thoughtful public policy development at their best. However its approach to infrastructure spending remains in the dark ages - an outlier of 19th-century thinking.
Essentially, the Treasury does not believe in publicly financed infrastructure spending. It sets the narrowest possible criteria for calculating benefits and then establishes a close to absurd framework for the thus priced infrastructure project to be financed. Every pinchpoint on the motorway system; every failed signal box; every overcrowded railway line roots back to the Treasury’s rules.
He continued:
It is particularly galling for outsiders - indeed for anybody who uses public transport - given the innovativeness of the private sector in using debt. I am critical of what private equity companies do when they take over public companies using billions of pounds of debt; but I admire their chutzpah - and wish the same attitude could be imported into the Treasury. If the amount of debt private equity companies had incurred buying Boots, and had planned in their ambitions for EMI and Sainsbury, were spent on rail, with one jolt Britain could be catapulted into the 21st century.
Why not? Why should it be possible for the full partners of a couple of private equity companies to shoulder tens of billions of debt and not the British rail system? Why is that risk deemed so much less than the risk of improving public transport? Why is public debt to acquire and build public assets regarded as the work of the devil but private debt on a larger scale to asset-strip our great companies regarded as benign?
His argument is entirely logical. And correct. Think what £9 billion could do for the rail system. And it added no value at all when used to simply transfer the ownership of Boots.
Richard Murphy Bonds
An aspect of my work which gets little attention here, but on which I am fairly persistently engaged, relates to developing new means of raising capital for essential social infrastructure projects. I work on this issue with environmentalist and economist Colin Hines. We had the following letter in this morning’s Guardian:
The prime minister is too fixated on building more homes. Another way to free up housing would be to get rid of the tax incentives for buy to let. Many people have entered this latter market as an alternative to what is seen as an unsatisfactory pensions system.
Why doesn’t Gordon Brown encourage local councils to attract pension-fund money through the issuing of local-authority bonds, and use this to invest in a dramatic increase in the stock of social housing? This would provide a secure income for part of people’s pension pots, and in the process result in both a social and a savings dividend.
Richard Murphy and Colin Hines
Finance for the Future
There’s more on this theme here.
Richard Murphy Bonds
