Commentary: Treasury can't bank on a gilts rescue

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The Independent Online
Is the clearing bank cavalry coming to the rescue of the Government, snapping up gilt-edged stocks by the billion? If it is, the Chancellor would suddenly acquire an important new source of funds and both the gilts and equity markets could breathe more easily. It would take no more than a technical change in the funding rules to allow bank purchases of gilts to count towards the public sector borrowing requirement.

Unfortunately, there is rather less than meets the eye in the surprise pounds 2.5bn increase in bank holdings of gilts in the January money supply figures. Only pounds 1.05bn went to the clearing banks. Of the rest, just under pounds 500m was bought by merchant banks, pounds 635m by American banks, pounds 128m by Japanese banks and the rest by other overseas banks in London.

In the context of a possible pounds 1bn-a- week funding requirement, most of these purchasers are also-rans. The merchant banks do not have big enough balance sheets; the Americans do, but not necessarily in the UK; and the Japanese have other things to worry about, at home.

It seems clear that the banks best able to buy gilts on a scale large enough to help the Government are the clearers, because of the sheer size of their balance sheets. But Lloyds and NatWest are cautious, despite the theoretical profits from investing cheap money borrowed from their depositors at much higher yields in the gilts market. NatWest thinks one- month money rates are still too near to the yield on three-year gilts for the game to be worth the candle. Buying gilts of longer than three to five years' maturity carries a risk of capital loss.

Abbey National yesterday disclosed a big rise in gilts holdings to nearly pounds 1bn at the end of last year, but does not intend to go much further. Midland is said to be a keen buyer of gilts, but there is no firm evidence yet that the clearers as a whole are piling in to help the Chancellor.

It is therefore good news that government borrowing appears to be turning out just a little better than either the Treasury or many in the markets supposed: instead of the Autumn Statement forecast of pounds 37bn for this year, some analysts are betting it will be as low as pounds 30bn and that the improvement will be sustained next year. With low inflation too, the threat of a funding crunch may be receding. Gilts prices are higher (and yields are lower) than they have been for more than 20 years.

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