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.
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Hi Richard,
Questions rather than comments: Can you tell me where the Government/Bank of England got the £50bn it is pumping into the financial system?
Am I right that this is “new” money, created into circulation against the collateral of mortgage debt held by banks?
Would it be technically possible for the BoE to create zero interest bonds?
And could they be used to fund PFI, for example: the Bank would then own local authority and other public service assets, rather than PFI companies, and the interest costs would be less — ie zero.
If so, could this be a way of putting debt-free money into circulation?
Does a rights issue, or any new share issue, put new money into circulation?