Wednesday, March 25, 2009
Gilt Markets' Failure is Worrying
The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades....Prime Minister Gordon Brown’s government plans to sell an unprecedented 146.4 billion pounds of debt this fiscal year as Europe’s second-largest economy grapples with its first recession since 1991. Demand hasn’t fallen short at a sale of regular U.K. government bonds since 1995.
In other words, we tried to borrow money and it seems our credit is seen as so dodgy nobody wants to lend us anything. Given Brown's policy is to spend his way out of the crisis on borrowed money this could be very bad news indeed. Especially coming on top of Mervyn King's warning to the Chancellor not to indulge in a give-away budget and the Treasury's consequent embarrassment. Vince Cable was able to (just about legitimately) use the colourful metaphor of the Bank of England driving its tanks up the doors of the Treasury.
Was King's warning a reflection of his inside knowledge of how bad things are? Or did his warning scare of lenders, fearing UK credit is now shot? Time will tell on that, but poor Gordon, returning home from Latin America might have to sort out that begging bowl lest used by Healey back in the 1970s when we went to the IMF for more money.
- the auction fell short by just £100m, or 6% of the target total
- the auction followed the release of surprise inflation figures (CPI jumping from 3% to 3.2%) thereby making non-indexed bonds less attractive
- the auction was for gilts with a 40-year maturity, which is rare (maturities are usually much shorter)
- quantitative easing has pushed down yields, making bonds less attractive to hold
- the last "failed" auction was just seven years ago - these aren't "one in a generation" events
- successful bond auctions were held shortly after.
The news made for great headlines, of course, and ideological debt-haters (think Osborne) jumped on it. Mervyn King, while better educated than Osborne, betrayed similar prejudices/instincts in his comments about fiscal stimuli. He doesn't know any more than the rest of us - the BofE uses freely available market data in its models - but instead simply prefers monetary to fiscal measures. Given that monetary policy has been pretty much exhausted, this view looks a tad out of date.
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