“Help to Refi” could be UK’s next financial wheeze

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British Prime Minister Liz Truss attends the 77th United Nations General Assembly at the United Nations headquarters in New York City, New York, U.S., September 21, 2022. REUTERS/David 'Dee' Delgado

LONDON, Sept 30 (Reuters Breakingviews) - Prime Minister Liz Truss’s rash tax cuts have rattled the government bond market. She needs to attract investors and bring yields back down. Breakingviews imagines a fictional adviser taking up the challenge.

Dear Prime Minister,

Thank you so much for that karaoke party last night. You nailed the high notes in “Waterloo”, and Kwasi Kwarteng’s “Livin’ on a Prayer” was absolutely rockstar.

On to more serious matters. You asked me what we can do to stabilise the UK government bond market. As you know gilt yields have shot up following Kwasi’s mini-budget. We’ve done our best to blame Vladimir Putin while attacking the socialists at the International Monetary Fund for talking down Britain. But higher yields are a serious problem. They push up borrowing costs for businesses, homeowners, and the government. Bank of England Governor Andrew Bailey has bought us a bit of breathing room by promising to spend 65 billion pounds buying gilts. But he insists that will end next month. We need to do something, fast.

One option is to fire Kwasi, reverse the tax cuts, and commit to a sustainable fiscal policy. Haha, I’m just joking! In search of other ideas, I reviewed recent Conservative government policies and found one unambiguous success: former Chancellor George Osborne’s “Help to Buy” scheme. As you may recall, this involved the government encouraging British people to take out bigger mortgages than they could afford by guaranteeing a chunk of junior debt. This enabled punters to borrow up to 95% of a property’s value. It got the housing market moving, perpetuating the property boom. As long as house prices never decline, the taxpayer can’t lose.

My proposal is to create a “Help to Buy”-like tool for the gilts market. The idea would be to get individual investors to buy long-dated government bonds with money borrowed from banks, underpinned by a state guarantee. The result would be attractive returns for punters, lower interest bills for everyone, and more economic growth to help Kwasi hit his 2.5% target. We could call it “Help to Refi”.

Here’s how the numbers work. Assume investors buy 10,000 pounds of gilts. Banks – which are all desperate to recruit more wealth management clients – could lend them 8,000 pounds against those bonds. To help get that past the risk managers, the government would put up 1,000 pounds of mezzanine debt, which ranks junior to the bank loan. Consumers would only need to put up 1,000 pounds of their own money.

Thirty-year government bonds currently yield 4%, which means a 10,000-pound portfolio brings in 400 pounds a year in interest. If the bank debt cost 3% a year and the government charged 5% for its portion, the investor pockets 110 pounds. That’s 11% of their initial investment – a positive real return even at current inflation levels!

To get some feedback from financial markets I ran the idea past my college chum Tristan, who’s a graduate trainee at Hellinahandcart Capital Management. He loves it. Just imagine: we could fund Kwasi’s tax giveaway while showing that trickle-down economics is more than a fairy tale to justify tax cuts for the rich.

The risk is that gilts fall. If that happens, the banks would demand more collateral from us and the punters. This is what seems to have caused the recent trouble with pension funds. The beauty of “Help to Refi”, however, is that if gilts fall then yields will rise, making the potential returns even more attractive.

In any case, UK retail investors currently don’t buy enough of their own government’s debt. As you might say: That. Is. A. Disgrace.

Kind regards,

Ivor Sly-Wheeze

Follow @Unmack1 and @gfhay on Twitter

(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)

Editing by Peter Thal Larsen and Oliver Taslic

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