This may seem technical but it is the way the nightmare the financial world dreads would start off. Darling may scorn Osborne while Brown ignores the problem but Cameron-Osborne are well aware of it and that is why their priority is sorting our fiscal problems starting as soon as possible.
That’s why Gordon clinging to office is not just a political gambit it is an economic gamble with our future when the odds are massively against us because of Brown-Darling blindness (and cussedness in Brown’s case) . With Darling allowing borrowing short on this scale the odds have significantly shifted against us.
Follow this argument through and one will be a lot wiser!
Christina
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30.9.09
Britain's rollover crunch
By Edmund Conway , Economics Editor
In these lottery-obsessed days, rollovers are usually something to look forward to. Not so for the financial sector. Both governments and banks are facing a serious issue over the next few years they confront a nightmarish volume of debt which needs to be rolled over. That, at least, is one of the interesting points buried away in the small print of the Global Financial Stability Report published by the International Monetary Fund today.
My news story on the GFSR – the IMF’s biannual examination of the world’s financial system,[is separately reported] – but there is also an interesting point I couldn’t fit in about these rollovers.
Funding has been hard to come by in the crisis (understatement of the year) so, in an effort to try to get hold of it, both banks and governments have resorted to borrowing money at shorter-than-usual maturities. This is a serious worry. After all, Northern Rock’s primary issue was that it relied too much on borrowing money short-term in order to lend it out in the long-term. It meant that if and when that short-term funding became unavailable, it was up the creek without a paddle. The problem is that banks across the developed world have been forced into a similar pattern. It may be through expediency rather than design but the fact remains that they will be much more vulnerable in the next few years as they come to try to roll this debt over. Gulp.
Banks face a “wall of maturities” in the next two years, constituting substantial rollover risk. For weaker banks that still cannot access private markets, the phasing out of government guarantee programs scheduled for the end of 2009 is likely to increase their reliance on short-term funding, resulting in even shorter maturity profiles.
The story is shown in the chart [which is of a poorish quality and which I do not include -cs] ,[ where one line shows the funding profile of banks before the crisis (note how it is relatively flat, indicating that their loans tend to be of varying lengths). The other line, which is more recent, peaks on the three year point, indicating that three years hence there will be a hell of a lot of debt to be refinanced. In other words, problems have been pushed off into the future, and not necessarily that far ahead.
What I find even more worrying is that a similar thing is true of governments, in particular the US and the UK, which have tended to borrow money at relatively short-term rates in order to get cheap deals. The report highlights the US issue in particular, saying:
The increasing rollover risk compounds fiscal sustainability concerns.
Some countries have increased the share of short-dated bonds and treasury bills in the issuance mix shortening the average maturity of sovereign debt. For example, in the United States, the average maturity of the marketable debt portfolio has recently fallen to 49 months, from 60 to 70 months between the mid- 1980s and 2002.
A similar story is true of the UK. And the implications are no different than they were for Northern Rock, except that this time around what is at stake is not the stability of a bank but of an entire economy. It also implies that the UK and US are highly vulnerable to a sudden jump in their own debt interest costs. At the moment it costs the taxpayer somewhere just north of £20bn a year to pay interest on its debt. This is already going to climb rapidly over the next few years because of the mountain of extra debt taken on as a result of the crisis, going up to around £60bn according to those leaked Treasury figures the other week.
But this rollover issue suggests that Britain may be even more vulnerable for this simple reason: when HMG issue a bond (known in the trade as gilts) they do so at a particular interest rate, which is set for the life of the loan. So even if people suddenly judge that the UK is a fiscal pariah, it only result in an increase on the interest rates for new loans it issues, whereas the 4pc rate on a 2005 loan will be set in stone until it expires.
Clearly, if HMG has issued a hell of a lot more 3 year gilts in the past couple of years than 25 year gilts, it will have to issue a lot more debt then, and if the perception of the UK’s creditworthiness deteriorates (as it is probably likely to do), it will have to pay higher interest rates on a much bigger chunk of its debt than would otherwise have been the case.
You see where I’m going here: it means Britain, and for that matter the US, are at risk of a compound debt interest trap, where the cost of financing their debt suddenly jumps so much that it can overwhelm the rest of the Budget.
At the moment this might seem a distant prospect, both for the Government and banks, but the IMF report makes it clear that there could be a serious crunch on the way.
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