Robert Stheeman: So what's worrying the banker in charge of our £1trn debt?

He is the man at the top of Britain's debt mountain. Sean O'Grady finds him in confident mood – for now

Thursday 08 October 2009 00:00

For a man sitting on top of one of the biggest mountains of debt in the world, Robert Stheeman looks remarkably comfortable, relaxed even. It's a wonder he doesn't get altitude sickness, given the dizzying heights that we used to call the "national debt" has scaled – and is yet to scale.

I meet the chief executive of the Debt Management Office (DMO) fresh from a sale of £2.25bn worth of index linked gilts due to be redeemed by HM Treasury in 2013. It sounds a lot to me. To me it's enough to buy, say, every single one of the 157,149 new cars registered in the UK in July, or 13,000 average British homes.

This 60-year-old former investment banker has obviously become inured to such vast sums since he joined the DMO, in quieter times, in 2003: "It's actually, compared to some of the auction sizes that we do now, especially for shorter dated gilts, not even that large. I think we're now averaging, for shorter-dated gilts, above £5bn."

In any event, Stheeman does recognise the size of the task he and his team of about 100 face. He will have to persuade the market to digest £220bn of new gilts this year, perhaps more, and much the same the year after, taking the national debt to a very grand total of £1.4 trillion in four years' time. Fully laid out that's £1,400,000,000,000, by the way, enough to buy a third of the houses in the country. Or, more to the point, the DMO will fund more government spending than will income tax this year.

"I think clearly the size of this year's financing requirement poses unique challenges. We're under no illusions about that. It's not just the size that's problematic, though. My problem occurs at different times when market conditions are not conducive to us issuing debt. If you have a very uncertain, volatile market, in which investors and GEMMs [gilt edged market makers, who participate in the auctions] feel very uncomfortable, that is a problem and we see that from time to time, and saw that earlier this year when we had an uncovered auction, a relatively small size of auction. The problem is not always the size of the auction but the environment in which we are issuing." The reason for that flop was that the auction was held quite close to the Budget, when the markets were depressed.

And the biggest cause of uncertainty now? What will happen to the Bank of England's programme of quantitative easing (QE), the purchase of gilts in the market to inject money directly into the financial system, pull interest rates down and generally get the economy moving along. By late summer it looked as though the Bank's then commitment of £125bn would soon be sufficient; then it was expanded by £50bn in August – a shock – and recent weak data on the UK economy has increased gossip that it could be increased again this November. This say economists, might be ideal timing because it coincides with the next Inflation Report, so the Bank can set its decision in context.

August's move was apparently a shock to Stheeman too, who says the first thing he knew about it was when it "flashed up on my screen".

"I think there will be probably at one point in the not too distant future a lot of uncertainty creeping into the market about the future of QE. Whether the Bank of England will continue with that... Even if it's decided to stop, I don't think that's a downside risk. The downside risk is the uncertainty." He adds: "Only when they've clearly moved ... will we have certainty back again."

How might that happen? "It must logically be on two stages. Stage one is the fact that at some point – I don't know when as I have no contact with the Monetary Policy Committee – they will stop QE.

"The second stage is that they may decide to sell some of the gilts – or they may not, because we have to be clear that selling gilts represents monetary policy tightening and you can argue that they may want to do monetary policy tightening through other methods. It is not automatically clear everything will be sold."

He says he would welcome an "orderly" change in policy when it comes. "In fairness the Bank made clear and the Governor himself said on many occasions that he will consult with us were that to arise and when they want to sell their holdings. No one in the authorities – the Bank, the Treasury or us has any interest in seeing a disorderly market."

"If they do [sell] then you have the potential of two big sellers – ourselves and also the Bank and the simple laws of supply and demand say the price of gilts will fall and yields will rise... Selling a large amount of gilts in a falling market is potentially more problematic than when prices are rising, for obvious reasons.

"On a historical basis we have been selling large amounts of debt at very low yields. It is not realistic to think that will persist forever."

He also thinks that the recent speculation about "negative" interest rates on the reserves the commercial banks hold at the Bank has also added to uncertainty: "It probably has had an impact at the short end of the market. Short rates are extremely low. We've noticed, it's fair to say, some Treasury Bills with very short dates where the tenders have been very well bid. That to me suggests that some investors are assuming negative rates and want to buy government assets that have a positive yield."

While steering very clear of politics, he recognises that a pre-election year also naturally adds to uncertainties, but also that there is much uncertainty anyway, but the policy debate may be helping.

"We started off the last financial year – Budget '08 – assuming we'd sell £80bn of gilts. It ended up after two revisions at £146bn. This year it is supposed to be £220bn. There is always massive uncertainty especially in the run-up to an election. The political rhetoric from most corners of the spectrum seems to me very much focussed on the deficit and potentially on reducing it, and that is something from which we should all draw comfort."

Would he ever tell the Treasury that he just can't sell the stuff? "Yes. I would have to. Otherwise I wouldn't be doing my job... But the gilts markets of the advanced economies represent some of the deepest and most liquid in the world. The chances that would happen are relatively slim."

So far, though the DMO's auctions, involving up to 15 GEMMS, subsidiaries of the big banking groups, demonstrate a "remarkably strong" appetite for UK government debt. "I would say that coming from a relatively low base of the stock of debt certainly compared to other countries gives the UK a slight advantage...

"We benefit from this very strong domestic demand from the pensions industry, which still forms the largest part of our investor base. We rely on them in particular." And, it seems, we will be relying on the DMO to keep on top of the debt mountain for some time to come.

Robert Stheeman: A life in debts

Born on 7 June 1959 in England, Robert Alexander Talma Stheeman went to Germany in his gap year and stayed longer than intended. Moved back to the UK in 1988. Married with four children.

2008 Awarded Order of the Bath

2003-present Chief Executive of the Debt Management Office

1991-2002 Director, Debt Capital Markets, Deutsche Bank, London

1986 Joined Deutsche Bank

1979-86 Various positions with German financial institutions

1982 Qualified as a Bankkaufmann at Hamburg Chamber of Commerce

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