U.K. May Revive Long Gilt First Used in South Sea Bubble

U.K. May Revive ‘Perpetual Gilt’
George Osborne, U.K. chancellor of the exchequer at the Ministry of Finance in Tokyo, on Jan. 18, 2012. Photographer: Tomohiro Ohsumi/Bloomberg

Britain is proposing to revive “perpetual gilts,” first used in the wake of the 1720 South Sea Bubble crisis, to allow the government to borrow for as long as possible at record-low rates, according to two people familiar with budget discussions.

Chancellor of the Exchequer George Osborne will use his March 21 budget to announce a consultation on introducing government bonds of up to 100 years and reviving debt with no fixed maturity, a sort of bond first issued in the 19th century to put off repaying debt resulting from the South Sea Bubble.

The cost of 10-year borrowing for the U.K. fell to a record low earlier this year as investors sought a haven from the euro-region debt crisis and the Bank of England bought gilts to help stimulate the economy. Yields on benchmark gilts reached 1.92 percent on Jan. 18, the lowest since Bloomberg started tracking the data in 1989. The securities currently yield 2.27 percent, compared with an average of 4.22 percent over the past decade.

“A 100-year bond is effectively a perpetual,” John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London, said in a telephone interview today. “From a borrower’s standpoint, it’s a very attractive product. There’s good reason to lock in low funding costs with yields at these levels.”

The Treasury has already had informal discussions with bond-market participants about the idea, according to the people, who declined to be identified because the plans are not yet public.

Index-Linked Demand

Investors that need to match their liabilities and assets such as life-insurance companies may be buyers, though the National Association of Pension Funds expressed skepticism about the plan, saying funds would rather buy more index-linked debt of between 30 years and 50 years and that it’s unclear if 100-year gilts would provide a big enough return.

“A 100-year bond would be too long for most pension funds, and we don’t think that many would buy them,” the chief executive officer of the London-based NAPF, Joanne Segars, said in an e-mailed statement. “Most final-salary pension schemes are now closed to new joiners and are becoming more mature. Their liabilities are long-term, but not that long-term.”

“Pension funds might demand a yield closer to 5 percent to 6 percent which would give them a worthwhile return,” Wraith said. The funds “may look at the amount of debt the government needs to refinance and assume that yields are going to rise materially.”

‘Major Restructuring’

Societe Generale SA said late last year that the U.K. should issue at least 200 billion pounds ($314 billion) of 100-year gilts.

A 100 year-gilt “paves the way potentially for a major restructuring of U.K. public-sector debt,” Marc Ostwald, a strategist at Monument Securities Ltd. in London, said in an e-mail. That “would more or less tacitly admit that lowering budget deficits and indeed overall debt burdens in the western world will not be achieved by austerity alone, and may indeed see many countries following Greece” in seeking an international bailout.

The U.K. has 162 billion pounds of securities due 2042 and beyond, according to Bloomberg data. The last maturity is in 2062. Britain has never sold a 100-year bond and has about 2.7 billion pounds of so-called perpetual gilts, which never mature, outstanding, according to the DMO website. The 3.5 percent War Loan, first issued in 1917, makes up 1.9 billion pounds of this total.

Early Disaster

The 1720 South Sea Bubble was an early disaster of English stock speculation, which saw its victims, including mathematician Isaac Newton, first become rich before being ruined. The following year, Chancellor of the Exchequer John Aislabie was imprisoned in the Tower of London for his part in the scandal.

Among other sovereigns, Mexico sold $1 billion of 100-year bonds overseas in August, taking advantage of a plunge in benchmark U.S. borrowing costs.

U.S. railroad operator Norfolk Southern Corp. sold $250 million of 100-year bonds in August 2010 in the first corporate securities of that maturity since 2005. Demand for longer-maturity debt enabled the University of Southern California to sell $300 million of 100-year bonds a year later, Bloomberg data show.

In May last year, Massachusetts Institute of Technology, which counts Federal Reserve Chairman Ben S. Bernanke and former U.S. Treasury Secretary Lawrence Summers as alumni, sold $750 million of taxable 100-year bonds to help finance expansion.


A U.K. issue may be sold through a syndicate of banks, rather than by auction, Wraith said.

“The case for doing a 100-year gilt by syndication is very clear,” he said. “You need the price discovery process, and you need the deal managers to find out where the demand is.”

Rachel Reeves, an opposition Labour Party lawmaker who speaks on budget matters, said in an e-mailed statement that “we will look hard to see if this proposal actually delivers value for money for the taxpayer.”

Next week’s budget will focus on the benefits to taxpayers of Britain’s low borrowing costs, according to the people familiar with the budget preparations. The Office for Budget Responsibility will say next week that a 1 percentage-point increase in gilt yields would cost the taxpayer a cumulative 20 billion pounds in interest payments by 2017.

Budget Talks

On March 20, the Treasury will publish final details of how its credit-easing program will work. Officials are finalizing contracts with a broad range of institutions. The program aims to provide finance for small- and medium-sized companies struggling to obtain bank loans.

The budget is close to being signed off by the “quad” of senior ministers who conduct negotiations on behalf of the two parties in the coalition government. They’re Osborne and Prime Minister David Cameron for the Conservatives and Deputy Prime Minister Nick Clegg and Chief Secretary to the Treasury Danny Alexander for the Liberal Democrats, the junior partner.

The quad met March 12 and may meet again on March 16, when Cameron and Osborne have returned from the U.S. It will meet for the final discussion of the budget next week.

All items with significant costs attached must be submitted to the OBR by the end of March 16. The OBR is a nonpartisan body of economists set up after the 2010 general election to oversee forecasting for the Treasury and monitor the public finances.

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