For ordinary Britons, and companies, the credit bubble is as much a matter of history as the Tulip bubble.
For governments, however, the credit boom is only just beginning. And Robert Stheeman is about to start running the biggest overdraft in British history. Mr Stheeman is the chief executive of the Debt Management Office, the government arm responsible for funding deficits.
I interviewed him last week – before today’s news that the UK faced having its credit rating downgraded for the first time since the second world war:
In 2000, just after the DMO was created, it had to raise just £10bn. Mr Stheeman has just started a series of weekly auctions designed to raise a remarkable £220bn this year, as the tax take collapses and spending on benefits increase. In the next four years he is estimated to have to raise £670bn as the recession bites.
In a remarkably frank interview Mr Stheeman admits that it’s a huge challenge:
“It is a major one, and the numbers are extraordinarily high, I wouldn’t want to pretend otherwise. At the same time we do have one big advantage and that is that the major government bond markets have become extremely liquid and extremely efficient…. and I’m often asked: can the markets take this – and the answer is, yes it can… I’m genuinely confident that it will be doable and that everything that makes our market work not just ourselves but the banks who help us sell our debt and whole investor community, domestic internationally will support the programme,” he told me.
Last week the Bank of England governor was more or less asked, now that the government has saved the banks, is Britain going bust?
Well it’s Robert Stheeman who is first port of call on that. He will oversee around 60 debt auctions. About a third of that debt is currently bought by foreign institutions, about which he says, “in general the message is quite clear they are comfortable with their holdings in gilts”.
Around half is lent to the British government by domestic savers via their pension funds. The first tangible sign that these huge levels of borrowing are becoming problematic would be an Irish-style downgrade to Britain’s AAA credit rating. Surprisingly perhaps, Mr Stheeman told me that this would not necessarily be a problem.
“A credit rating is a significant factor, looked at by international investors in particular, at the same time a credit rating is ultimately just that, its an opinion by the credit rating agency. I don’t think it would fundamentally change the way international investors view our debt, it could mean they might demand fractionally more in terms of yields, [but the difference] could easily be imperceptible,” he said.
He admitted that the cost of paying the interest on government debts was shooting up: “I don’t see it turning into spiral, but it is getting significant, a significant part of government spending.”
Some international investors, like Jim Rogers, who I interviewed earlier this year, have raised the prospect of Britain not being able to sell gilts. When I asked the man charged with actually selling the gilts if he was worried, he said: “Genuinely not,” describing “huge interest” in his auctions.
So there we have it. Quadrupling Britain’s overdraft – no problem. What Mr Stheeman seems to be saying is that whatever the level of borrowing required by the government, it can be accommodated – at a price, because the market for government debt is so efficient.
But that raises two questions: have we really “run out of money” as some politicians suggest? And might there be another reason for the DMO’s relaxed vigilance? More later.
UPDATE – Today the ratings agency Standard and Poor’s said there was a one in three chance the UK’s credit rating would be downgraded. See the report on tonight’s show at 7pm.
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Britain does not ‘need’ to run out of money.
China has been buying USA debt for years. But has this been part of the problem with the USA ignoring what is now evident – that its consumer-led spending spree was unsustainable, in all meanings of that word?
Provided the UK is happy to follow suit, and overseas nations and investors are willing to keep buying our debts, our ‘leaders’ can continue to say that ‘everything possible is being done’ to mend the economy.
That is short for: ‘Let’s get back to where we were just before the crash.’ What a prospect.
How China and other creditors will use their hold over the UK / US economies in any power-play is to be seen.
Meanwhile, the fear that Britain is bust is being used by Mr Cameron et al to talk tough about public services having to share the pain of the financial crisis.
The crisis originated in arcane sections of the private sector albeit with the collusion of government and the unwitting acceptance of pliant consumers.
When your money has run out you must start using your brain, the saying goes.
So if Britain is bust – and even if it isn’t – it’s time to review big ticket items like: ID cards; Trident, bank bailouts, PFI mortgaging of hospitals and schools, dodgy road schemes, Ministry of Defence handling of contracts etc…
I’m off to the pawnbroker.
Asproclear – how does cancelling ID cards save the public purse billions exactly? It’s a cost recovery system just like passports. The cost of issuing ID cards is met by the payment made by the person purchasing the card.
The cost of running the passport and ID card service over the next ten years in £5billion, but it’s all recovered from selling passports and ID cards. It’s not taxpayers money that can be spent on somethign else or somehow ’saved’ by the Government. I suppose you could propose to leave that money in the economy to be spent by individuals on other things, by sinply not issuing passports and ID cards for the next ten years, but I’m not sure you’d get anyone rational to agree with you. It’d put all our airlines, airports and travel agents out of business for a start. And anyone with a holiday home abroad and a passport that’s expired would be more than a bit annoyed with you too. I could go on….
Yes, you could go on, but would it add anything?
In your focus on the apparent costs or benefits of Identity Cards which, for the record, I do not oppose other than that I still await to see any Minister hold an open and honest debate about how they would be used and paid for, you have not yet addressed my wider – and, frankly, more important, economic points about how to start building a truly sustainable economic recovery – social, economic and environmental.
If you can do that you deserve to be elected to the next House of Commons – should you wish that.
Good luck and regards,
asproclear1
To Faisal Islam: I am hearing rumours about the high level of the euro from people who have contact with hedge fund managers who are saying that when the dreadful state of Austria’s finances are made public the value of the euro will hit the floor. As soon-to-be ex-pat in france I have a vested interest in the strength of the pound against the euro. Is this something that Faisal is aware of?…and perhaps he might investigate it with his contacts among hedge fund managers?
‘Money makes the world go round, the world go round, the world go round…’ But greedy corrupt people make it stop.
What, in your opinion is the future of the British Pound in relation (exchange rate) to the US dollar and the Euro within the next 12 months?
if we get back to basics and be prepared for radical action we can deal with a few problems at once
it is not efficient use of taxpayers money to be forever paying off interest on the buy today pay tomorrow doings of consecutive governments
we have more going out than we have coming in and it is the opposite in international trade
there is so much we can do to reverse these trends but that requires cooperation and not bickering between the liblab con
a forlorn hope perhaps or do we just plod on for another 50 years until the wealth of the country is completely drained?
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