U.K. Will Take Generation to Cut Borrowing, Debt Chief SaysEshe Nelson
It will take a “generation” before the U.K.’s borrowing shrinks back to pre-financial crisis levels, according to Robert Stheeman, chief executive officer of the Debt Management Office.
The nation’s gross financing requirement for the next fiscal year rose to 171 billion pounds ($268 billion), the DMO said after the government’s Autumn Statement earlier this month. That’s an increase of 20 billion pounds from the forecast in the March budget, highlighting the challenges lawmakers face as they try to control Britain’s borrowing.
“The Autumn Statement confirms the theme, which is that we’re not going to go back to the sort of 40 to 50 billion-pound annual remits, which we were used to eight years ago,” Stheeman said in a phone interview last week from London. “We’re not going to go back to that in a hurry. It’s going to take a whole generation in my opinion.”
U.K. politicians are debating how to erase the budget deficit, which has become a central topic of contention ahead of the general election in May even as gilts rallied this year. Finding buyers for the debt hasn’t been a problem and 10-year borrowing costs have fallen this year. Current government projections show the budget won’t return to surplus until the fiscal year 2019/20, when no new borrowing will be needed.
Britain’s two main parties have diverging strategies on how to end a chain of budget deficits. Chancellor of the Exchequer George Osborne pledged to achieve a budget surplus of 23 billion pounds by 2020 if his Conservative Party is re-elected. The opposition Labour Party has said it would erase the deficit on day-to-day spending as soon as possible.
Even after the budget deficit has been erased, Britain will still face a debt mountain that exceeds the current level.
Public-sector net debt, excluding public-sector banks, was 1.45 trillion pounds, or 79.5 percent of gross domestic product, in October 2014, an increase of 97.1 billion pounds compared with October 2013, according to the Office for National Statistics.
The U.K. will sell a gross 125.9 billion pounds of gilts in the financial year ending March 2015.
Stheeman, who joined the DMO more than 10 years ago, has seen the remit, or the amount of gross debt needed to be sold, rise from 26.3 billion pounds in his first year, to as high as 227.5 billion pounds in the 2009/10 year.
“You can see that already, we know for a fact, that in the financial year 2019/20 we are going to have to raise 93 billion pounds just on account of redemptions,” Stheeman said. “The scale of the market has changed. For us to go back to the sort of market we had a few years ago, I don’t think it’s going to happen in my career.”
At the last auction of 10-year debt in November, the bonds were sold with an average yield of 2.205 percent, up from 2.149 percent the previous month, which was the lowest since April 2013. Britain’s borrowing costs are expected to rise as the Bank of England raises interest rates next year. Ten-year yields will increase to 3.03 percent by the end of 2015, according to forecasts by analysts compiled by Bloomberg.
Benchmark 10-year gilt yields rose 1 basis point, or 0.01 percentage point, to 1.81 percent today at 4:17 p.m. London time. The yield fell 22 basis points last week. The 2.75 percent bond due in September 2024 fell 0.135, or 1.35 pounds per 1,000-pound ($1,572) face amount, to 108.305 today. The pound weakened 0.6 percent to $1.5618 and slid 0.4 percent to 79.57 pence per euro.
While the market has adjusted to an annual gilt remit in excess of 100 billion pounds, the DMO is keeping a close eye on the trading capabilities of its primary dealers to support this, Stheeman said.
Primary dealers, which trade directly with the DMO, have said that one of the biggest challenges they may face is new regulation on leverage ratios that could lead them to reconsider the value of dealing in risk-free assets, such as gilts. Banks will have to hold capital in relation to their total assets not weighted for risk. The DMO has 21 primary dealers, including HSBC Holdings Plc and Barclays Plc.
“A lot of this is still in the early stages but the leverage ratio regulation has the potential to cause some primary dealers to reassess the overall profitability of their business models and whether or not they want to remain in this market,” Stheeman said. “It is incumbent on debt managers to follow this very carefully as it unfolds because most of us have significant borrowing requirements and all of us require well-functioning markets and well-capitalized banks providing liquidity.”