The government has issued a press release today saying:
Government to pay off part of the nation's First World War debt, as part of a redemption of bonds stretching as far back as the eighteenth century.
It continued:
The Chancellor of the Exchequer, George Osborne is today announcing that the government will pay off part of the nation's First World War debt, as part of a redemption of bonds stretching as far back as the eighteenth century.
The Treasury will redeem £218m of debt from the 4% Consolidated Loan on 1 February 2015.
That's staggering, you'd think. Except all is a very long way from what it seems. Or to put it another way, George Osborne is lying through his back teeth.
First, no debt will be repaid as a result of this move. The UK has noi money to repay debt. It is borrowing more than £100 billion this year. So to say this debt is being repaid is straightforwardly untrue. It is being replaced with other debt.
Second, the "4% Consols” to which the press release refers are not war debt. They were issued in 1927 to replace war debt issued at 5% to reflect the fact that interest rates had fallen in the meantime. So they're not war debt at all. That's the second lie.
And the third lie? That's that this is somehow a part of a process of old debt repayment that reduces the burden of long term borrowing. It isn't any such thing. The simple fact is that the UK government can currently issue debt at 4% or less and so this is a simple exercise of substituting new, cheaper debt, for old debt, just as happened in 1927. If the 1927 debt was war debt, then so is the new debt going to be war debt as well. Or not, as the case may be.
It deeply irritates me that we have to suffer the nonsense that is said when simply making a financing decision. George Osborne dishonours those involved in the process, all along, by uttering it.
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“It isn’t any such thing. The simple fact is that the UK government can currently issue debt at 4% or less and so this is a simple exercise of substituting new, cheaper debt, for old debt”
Think you might want to check your bond maths here. Bond coupons are immaterial to the interest rate yield on the bond. Repurchasing old higher coupon bonds and issuing new ones with a lower coupon doesn’t save you a penny.
“to to say this debt is being repaid is straightforwardly untrue”
Good thing then that Osbourne is not saying repaid. He is saying redeemed. Bonds redeem all the time but it is very different to saying any net debt is being repaid.
There is no redemption on this bond – it is repaid as it is undated
And yes I understand the maths of bonds: but this can only be because there is a differential to be had. It may be because they are undated that it exists, but it must be there
All these perpetual bonds were callable. These days they are almost extinct as a class of bonds. My guess is that these were redeemed early because the amount outstanding is so low that they have become untradeable and under the minimum amount for exchange settlement and for use as tier 1 capital.
“And yes I understand the maths of bonds: but this can only be because there is a differential to be had. It may be because they are undated that it exists, but it must be there”
I’m not sure what you are getting at here. These particular perps were trading at a yield similar to 20y maturity bullet Gilts. PV the cashflows on a perp and you end up with something that looks almost exactly the same as a nominal bond.
As I said – the coupon rate of a bond is immaterial, the yield on the bond is what matters.
Of course bond prices fluctuate with interest rates. But if Osborne is buying back at face value, not market price, then the original rate of interest is what matters.
Indeed…
Since good old George took his ‘austerity punt’ we’ve seen the overall debt figure rise yearly while the US, which adopted a Keynesian approach, has seen their’s start to fall.
I don’t, for a moment, imagine Dave or George will apologise for the economic illiteracy of claiming that their opponents believed in a magical money tree, or that, before they took office “money was about to run out”.
Instead they trumpet the rather obvious point that once interest rates hit rock-bottom you’d seek to replace higher-interest bonds. They know they haven’t a hope of repaying the UK’s vast deficit &, I suspect, they wouldn’t even want to as it gives them a perfect excuse to have a go at the poorest welfare recipients.
It is a bit reminiscent of Okonkwo’s father in Achebe’s great novel “Things fall apart” drawing lines on his hut floor to say “now, were I to repay anyone’s debt, I think I’d start with ….”