The UK’s Treasury has announced the possibility of a new bond issue that would take advantage of Britain’s status as a ‘safe haven’ and the historically low borrowing rate of 0.5% to help reduce the national debt. At present, the plan is subject to review in the form of consultation with potential buyers, according to Robert Stheeman. chief executive of the Debt Management Office.
The proposal is for the government to sell bonds with a 100-year maturity, or even longer; buyers would presumably be entities such as pension funds and insurance companies that look for long-term security in their investments. The idea with these ‘perpetual’ bonds is that the UK would pay only minimal interest until maturity, which theoretically could be never.
The question, said Stheeman, is whether there will be enough buyers, and how cost-effective this option would prove to be. The final decision, basically, will have to come from George Osborne, as head of the Treasury department. In his budget statement of 21 March, there was indication that consultation is still going on.
Long-term bonds are not unique in Britain’s history; the oldest was issued in 1863 to refinance debt from the bursting of the 18th century South Seas bubble of manic investment. More recently is the perpetual bond of £1.9 billion issued in 1932 to pay off debt incurred in World War I. The average current period for UK bonds is 14 years, about twice that of other leading global economies.
A UK economic analyst at Capital Economics noted that the issuance of a 100-year gilt bond is based on the assumption that interest rates will eventually return to ‘normal’, and it suggests that Britain is confident in remaining credit-worthy for the long term. Other analysts say that the suggestion of a perpetual bond issue indicates the government is admitting that austerity measures alone will not be enough to substantially reduce the national debt.