The Guardian is making a splash this morning on his story:
Senior Whitehall officials fear Thames Water's financial collapse could trigger a rise in government borrowing costs not seen since the chaos of the Liz Truss mini-budget, the Guardian can reveal.
Such is their concern about the impact on wider borrowing costs for the UK, even beyond utilities and infrastructure, that they believe Thames should be renationalised before the general election.
I am struggling to come up with an appropriate word to describe this observation from the UK government's Debt Management Office, and the only one that I can think of is drivel.
There are several reasons for saying so.
First, if any Thames Water debt is taken on by the government, there will be assets to back the value. Otherwise, there would be no reason for taking on the debt.
Second, that debt is £14.7 billion at present, meaning that the payment made will be somewhat less as everyone expects that a haircut will be applied to its value. When total government debt is, even if stated correctly net of QE, more than £1,600 billion, to suggest that an additional £10 billion or so, because of the acquisition of the assets of Thames Water might totally destabilise markets is really quite ridiculous
Third, if there is any risk of such instability, then the simple answer is that the Bank of England should hold back on its quantitative tightening programme, which is expected to involve the sale of at least £100 billion of debt into financial markets this year for absolutely no net gain whatsoever to the government, or to society, or to public finances, except that this sale will keep the overall level of interest rate payable on government debt higher than it otherwise might need to be solely for the purpose of supporting the Bank of England's extortionate interest rate policies.
Finally, this debt could, of course, be covered by additional QE without markets blinking.
I am wholly supportive of the nationalisation of Thames Water, and the other English water companies. This type of hysteria does, however, suggest that the Treasury and the Debt Management Office are continuing to act in anything but the best interests of the UK as a whole by spreading total misinformation.
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so with quantitative tightening, if they sell the bonds to the market, what do they do with the money received?
It is like a repaid bank loan and just cancelled? Or held in a reserve account?
Will the bonds have to be redeemed at some point in the future?
I am trying to see the logic.
It is just cancelled. That’s it
It reduces the money supply, pushing the price of money up
It is inflationary
sounds like needless, self inflicted injury.
“It reduces the money supply, pushing the price of money up, It is inflationary“
So you believe reducing the money supply is inflationary!! … By definition you must think increasing the money supply is deflationary!!
Why is no one on this blog disagreeing with this?
Increasing the price of money (interest) is inflationary
Of course it is. How can it not be?
Lots of questions on QT …..
MY ANSWERS IN CAPS
Is there a distinction between the volume of money (in circulation) and the price of money in MMT ?
YES – BUT THERE IS AN ASSCUATIIN
Is it true that manipulating the bond market via QT both reduces the volume of money and increases, or reinforces the levels of, interest rates ?
QT IS INTENDED TO FORCE RATES AS QE FORCED THEM DOWN
What is the practical difference between how QT works and just banging up the headline rate ?
QT REINFORCES THE DECISION TO FORCE RATES UP
The effect of increasing the headline rate is reckoned to be two years plus, but surely QT has a much more rapid impact ?
YES, HENCE ITS USEFULNESS TO THE BOE
Does it depend on how much credit is in the system, and how much borrowing both consumers and business have, as well as the relative capacity of the whole economy ?
ONLY A LITTLE – THIS IS ABOUT RESERVE ACCOUNTING
What are the riders to that ? I’m not sure at all sure that I get the nuances of MMT here …..
WE ARE LEARNING AS WE GO
(though I fully endorse the arguments for nationalising failing utilities and rail – and with big haircuts whenever appropriate).
Sorry to be thick.
Surely if the BoE issues a bond, it only reduces the amount of money in circulation temporarily?
Will it not need to create money in order to repay the bond holders when the bond matures?
Plus creating money to pay interest on the bond?
Hence the long term effect should be to increase the amount of money in circulation?
Maturing bonds are always replaced by new bonds – net bond maturiy almost never happens
I assumed it was done to push nationalisation before the company fails, so the shareholders will have to be paid at a higher level than they would get after their shares became worthless?
Yes but: yer gotta sell newspapers & headlines – shock horror – “Freddie Star ate my hamster” does it. “Oh my god its Trussonomics II” – ditto & largely performative. As for the treasury – why would they make it seem easy? If they did, the chorus would increase – more nationalisation – & we can’t have that, goodness me no.
Leaving the open question: to haircut – or not. Even now, over paid lobbyists will be in No 10 (& the treasury) – pretty pleases flying around – will Sunak sacrifice his mates/give them the skinhead hair cut they deserve? Or are future job prospects a consideration (“Rishi my boy we have a great position open for you – once you quit politics – but it all depends you see..Jake is really worried with this Thames stuff… his clients are nervous….”) Does the reality that, many/most/all Tory voters would like to see ThamesSewage nationalised – & perhaps the owners punished, have any leverage? Probably not – election is lost whatever. Prediction – Sunak & co will given the bond bandits a free ride, & a few ciphers will get couple of slapped wrists. Treasury will twist and turn making it all seem very difficult and very exceptional. LINO gives a sigh of releif.
I don’t think there is any suggestion of instability in the gilt market if Thames Water were taken into public ownership – if there is it is nonsense. As you say, the numbers are a drop in the ocean. I think the point is that it will make financing for other companies more expensive and there is a risk of instability in this market.
But isn’t that the point? Water (and other firms) are too heavily indebted. Lenders will raise the cost of borrowing to reflect the risk of a haircut in a future nationalisation, firms will have to reduce dividend payouts to fund investment and reduce overall debt. If they can’t then the “Thames solution” awaits them. I see this as a good outcome.
Of course, the size of the haircut is still being discussed but I would say two things; first, the haircut will be closer to my thinking and much smaller than most readers here would like (and on this you and I will disagree), second, it does not really matter too much whether it is 50% or 25%… the prize is “taking back control” (if you will forgive the phrase).
You are right. Debt does need to be appropriately priced.
With or without compensation to the shareholders?
Without would cause huge turmoil as it would undermine property rights, the rule of law and deter future investment and planning applications
Don’rt be silly
The shares are worthless
That’s the always anticipatable consequence of owning shares ina. copmpanby – they can go bust
As a rule of thumb, anybody (I suspect it is the same person each time) posting on here using the name of a footballer/boxer/sportsman is all but guaranteed to be posting disingenuous guff. I do wonder if it is just random trolling, or if they are being paid for it.
Who knows
I guess I should check all names
French footballer alert!
Damn…
Shares are worthless. I think that is well accepted by everyone….. including current shareholders. I think their refusal to inject new equity says very clearly that they don’t think they can meet their obligations to deliver water and sewage treatment at the agreed quality and prices… and are choosing to walk away and take their losses.
The issue at hand is what happens to creditors of the operating company. How big a loss should they take…… and this more difficult. However, what is certain is that they will take some sort of loss.
“Without would cause huge turmoil as it would undermine property rights, the rule of law and deter future investment”.
Since we are in whimsical troll mode, may I remind Mr Foot-in-Mouth that this was exactly the argument the slave owners advanced in Parliament in 1833; managing to oblige the British Government to commit to spending an eye watering, National Debt increasing lump sum to reward the slave owners for freeing the slaves, at “market value” (set at a price as if the market would continue- which of course was a non-sequitur). The slaves received not a bean (indeed slavery was effectively extended a few years by a faux ‘Apprenticeship’ scheme; nod and wink). Therefore, you have an excellent precedent for another big pay day for the rip-off pay outs to continue. Great argument – I cannot understand why you need to hide cravenly behind a pseudonym when you have such obvious wisdom to offer us.
Thank and well said, Richard.
The post hair cut figure would be a rounding error in the grand scheme of things.
Robert Sthheeman went to the same school as me. We have also worked for the same German too big to fail. I’m not surprised by the DMO’s scaremongering. I’m only surprised that the Old Lady, the one on Threadneedle Street, not the one in Turin, has not clutched her pearls yet.
Some years ago, Cummings explained that the £350m figure on the red bus was carefully chosen as most people think that’s a lot of money and have no idea of what size of the budget, UK economy and where wealth begins. The red was also chosen to appeal to the red wall.
My first reaction on seeing this story was that it had the Tufton street/Tory Party/City of London mafia written all over it.
Having read the Guardian for the last fifty years you notice that in order not to arouse suspicion occasionally stories like this will be passed on initially to some useful idiot working for the paper. After all, who will take the story seriously if it first appears in the Daily Mail or Telegraph.
Unfortunately, its a trick that often works.
Prior to the 1979 General Election John Cole, the Guardian’s Political editor, was so disgusted at the papers idiotic support for Margaret Thatcher that he resigned and joined the BBC.
These days, out of the frying pan and into the fire, but not so much then.
The only way I can interpret the DMO, if that is the source, is that as the “free market” in utilities house of cards slowly collapses, they are incapable of thinking out of their narrow, incapable ideological box.
I understand gas prices are rising. There is no real free market in energy. The oil and gas market is under the distortions of OPEC (Saudi Arabia can flood the market at will, or turn the tap off), Russia (I do not understand how Russia operates – does anyone?); and after reading Matt Stoller I do not understand where or how US shale supplies operates in world markets. Does anyone know? Would anyone care to supply an expalantion. Would anyone care to suggest the world has a “free market” in energy?
Can anyone tell me how we in Britain allowed ourseleves to paint us all into an energy corner, paying World Prices for energy (as if it was a free market)?
Quite right John.
The reality of the completely rigged and opaque markets in Energy and how this country should deal with them in order to make Britain and all the people that live here secure falls into that category of topics that are never allowed to be publicly discussed, like Brexit.
You would think that at least some of the public would notice that there is something fishy about a government who will jail you if you mention Climate change in a courtroom, but apparently not.
Mr Warren, it works as follows: first you develop circular (& neo-liberal) arguments on the perfection of markets, some rituals (Our market which art in heaven), regular gatherings of the faithful (World Economics Forum) – obvs with some tokenistic outsiders to provide entertainment, tax breaks for the good old boys (frackers) and add in a dash of cognitive dissonance (the arabs & oil, or in the case of Germany, Vlad & his gas) .
If one wrote a novel with all these features it would be rejected as far too unlikely – but we live in the real world. In the case of the UK, it has never got over the loss of Empire, which in any case was gained and run by a coterie of crooks, thieves, liars & amateurs – who now have nowhere else to play – apart from the UK.
In the final analysis, the late great Iain M Banks delivered a response to “the human condition” in his final Cutlure novel “The Hydrogen Sonata: “one takes the attitude, oh well never mind, it would be far preferable if things were better, but they’re not, so let’s make the most of it. Let;s see what fresh fuckwittery the dolts can contrive to torment themselevs with this time”. Harsh but true – voters only partially engaged and mostly never able to understand what the hell is happening either to the country or themselves.
Thank you Richard
Fascinating post and discussion here.
There is a rumour that Thames Water are planning a final dividend of £2bn to shareholders before the rotten edifice collapses. Anyone know if there might be any substance to this?
No…
Neither do I but it wouldn’t surprise me a bit if the management of Thames were going to doll out more money for nothing to the shareholders and then watch as it collapses but is bailed out with ‘taxpayers money ‘ by our moronic ‘government’ who will still refuse to admit that their precious “market” had obviously failed and an essential monopoly such as water should be the responsibility of the state. Why would they do this? Because, I bet, the overpaid idiots on the Thames board have remuneration packages linked to the amount of “shareholder value” they can produce so the way they’ll get a nice fat bonus for failure is a final dividend bonanza for the shareholders. Cue ritual condemnation from labour who however won’t say Thames should be nationalised and should never have been privatised in the first place. That might require a bit of intelligence, honesty and courage from them. Dear me, no way.
Might responsibility for the debt be with T. W.’s leadership and shareholders who, presumably, ran up the debt?
It is
Nils Pratley writes on Water in the Guardian this morning – it seems a realistic assessment of how things might work out…. and I am not sure that it is good.
If the regulator is “soft” as he suspects then the show goes on for 5 more years for all the water companies with, perhaps, the exception of Thames Water. 5 more years of failed delivery and broken promises.
The problem is (as with Rail) that profits and investment can be regulated but money seeps out to linked contracting entities (Rolling Stock Leasing companies for Rail).
It would be preferable if the review were delayed until after an election…. if Labour would “step up”.
That would be a terrible outcome and I suspect someone has been whispering it in his ear..