U.K Chancellor Flirts With the Idea of a Super Long ‘Century’ Bond
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U.K. Chancellor George Osborne says Britain could start selling 100-year bonds as the country tries to reduce the government’s long term debt costs.
The Debt Management Office said that initial talks with investors were positive, and the perpetual ‘century’ bonds will mean that the long-term cost of servicing part of Britain’s debt would remain at the current record low interest rates for a significantly long period of time.
U.K. Chancellor George Osborne says Britain could start selling 100-year bonds as the country tries to reduce the government’s long term debt costs.
The Debt Management Office said that initial talks with investors were positive, and the perpetual ‘century’ bonds will mean that the long-term cost of servicing part of Britain’s debt would remain at the current record low interest rates for a significantly long period of time.
Should the DMO’s consultation with gilt market players go well, investors can expect to see the bond on sale as early as the next financial year. According to a Treasury official, Osborne plans to unveil the bond at his budget speech scheduled for March 21.
Currently, Britain’s longest bond has a maturity period of 50 years. The typical government bond can range from 10 to 30 years.
While unusual, such long-term bonds aren’t without precedent. Mexico and the Massachusetts Institute of Technology are among the few issuers of 100-year bonds and the U.K. has issued perpetual bonds in the past – the first at the beginning of the 19th century, and again after World War I.
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A Treasury official said:
[quote] This is about locking in for the future the tangible benefits of the safe-haven status we have today. The prize is lower debt interest payments for taxpayers for decades to come. [/quote]
However, the plan has come under fierce criticism from lawmakers and economists, who urge the Chancellor to implement stimulus measures in his budget, following the recent years of austerity cuts.
As the Financial Times commented:
[quote] A perpetual is not such a good idea. As Julian Wiseman at Société Générale points out, perpetuals are excluded from many index-tracking portfolios, reducing demand. They have little financial advantage either, because income 100 years hence has little value today, making a perpetual almost identical to a 100-year. [/quote]
While the government is expected to announce details of a credit easing plan, Osborne has vowed to protect Britain’s stellar triple-A credit rating – a vow that rules out extra borrowing to fund tax cuts.
Osborne added that despite the government’s relative success in bringing the deficit down, the budget imbalance remains too high.
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