Leading article: Adverse signals from Osborne bonds

Click to follow
The Independent Online

George Osborne is thinking of issuing 100-year bonds to get hold of cheap money for the Exchequer. He plans to take advantage of two things – the fact that interest rates are at a historic low and the fact that investors see Britain just now as a haven from euro turmoil. Some of our banks may be bust, our unemployment soaring and our public services slashed, but it is all much worse elsewhere. So investors would be well-advised to buy British, when it comes to gilts and government bonds, at any rate.

You can see the attraction from a taxpayer perspective, too: if we can obtain money cheaply, let's do it and plough the money into new jobs, infrastructure and growth. Seen through a buyer's eyes, though, it looks more problematic. Some investors will like the idea of a safe security with a fixed interest rate for a long period. But many among the target buyers – the pension funds – are already hinting that yields on these Osborne bonds would be too low to be attractive.

In any case, the sort of pension schemes that could stock up on such long-term debt are being wound down everywhere. There may well be none left in 50 years, let alone 100, as companies switch to money-purchase schemes. Osborne bonds could easily outlive their use.

Yet there is a more important reservation. The bonds depend on seeing the cheapness of borrowing as a virtue. But if there were to be significant take-up of 100-year bonds, that would signal that investors expect interest rates to remain very low because the economy is so weak.

What the British economy needs, by contrast, is for interest rates to rise because growth is reviving. When that happens, the Bank of England can stop trying to keep interest rates down by creating tens of billions of pounds of new money through quantitative easing. Osborne bonds might either lose investors money or condemn Britain to a Japanese-style lost decade – leaving Mr Osborne with nest egg all over his face.