How should we pay for the energy crisis?

In 2020/21, National Savings and Investments, the government-backed savings vehicle, raised a net £24bn from the British public. Admittedly, it was a freak year for inflows for all sorts of reasons, but it demonstrates the pulling power of the business, one of the few state institutions which seems to function without fuss or serious incompetence.

We now know that the government is going to have to raise over £100bn more from the markets than was expected just a few short months ago, as the price of energy is capped to save much of the population from poverty and much of the small business world from bankruptcy.

There will be plenty of criticism about the detail, and a lot of the aid will go to those who don’t need the money, but however you look at it, we are in a national financial emergency, and the normal rules no longer apply. Quick and simple trumps slow and complicated.

The death of the Queen has distracted us from the sheer size of the state aid and the borrowing needed to pay for it, yet it also provides an unparalleled opportunity for fresh thinking on fund-raising for the state.

Here’s some. An Elizabeth Bond would capitalise on the outpouring of patriotic emotion of the last fortnight. This is not something for the Debt Management Office or the Bank of England, both of which are essentially concerned with tapping the international bond markets, what Mark Carney once irritatingly (and wrongly) described as relying on the kindness of strangers.

Instead, it should be aimed squarely at individual UK investors, inviting us to understand the fiscal mess we’re in, and to fund the government to the other side of the energy crisis. Looked at this way, the state’s position today is akin to that other desperate need for money to pay for another national emergency, the First World War. The solution then was to issue a bond which dwarfed all others at the time. It became War Loan.

Similarly, the Elizabeth Bond would need to be more imaginative than we have grown used to with debt offers, but since the government can write the rules for National Savings any way it chooses, it might invite NS&I to come up with an idea. The bond could (for example) allow holders who leave their money in for a decade to withdraw it with the rolled-up interest tax-free. NS&I demonstrated last year that it is capable of handling tens of billions of pounds without breaking down.

The mixture of sentimentality and self-interest is a potent one, and today’s opportunity for a truly radical policy is unlikely to recur. Co-incidentally, today’s yield on long-dated UK stock is close to the 3 1/2 per cent coupon that War Loan used to pay. Until the currency was debauched in the 1970s, it was a reasonable investment. Were we to own Elizabeth Bonds with a fixed rate of interest, we would understand first hand why controlling inflation is so important, and back any government that insisted the Bank of England got serious about doing so.

Bank makes mistake in your favour

Straight off the Monopoly board, here is a true life tale, but without the fairytale ending. Two years ago a fat-fingered employee at Citicorp, the bankers to cosmetics maker Revlon, accidentally sent the principal in an outstanding loan, rather than the due interest, to the creditors. Before that, Revlon and Citi had been fiddling with the trust rules in a way that damaged the security of the holders of the debt, so they were feeling pretty cross.

Imagine their delight when $500m of repayment popped up unexpectedly. The next day Citi asked for the money back, and the holders said: see you in court. The case has been grinding on ever since, but earlier this month Citi won its appeal against an earlier ruling, and now the holders must pay the money back. In the interim, Revlon filed for bankruptcy.

It is, we must reluctantly agree, a sensible ruling, since whatever they said at the time, the recipients must have known the surprise repayment was a mistake. If they hadn’t already been cross at Citi’s maneuvering which disadvantaged them, they would probably not tried it on. You can read an entertaining account of the affair here. The upshot is that loan agreements now routinely carry a clause to cover such fat-fingered mistakes. It’s called a “Revlon blocker”. Well, it is a cosmetics company, after all.

Bank Rate up!

So the Bank of England’s Monetary Policy Committee is catching up after all, raising Bank Rate by another notch this week, on the way to 4 per cent, say Capital Economics. Oh, hang on, that’s not right. The MPC joined the Football Association and Centre Parcs in suspending operations as a mark of respect following the Queen’s death. So no meeting of the MPC until next week. Ah well, what’s another week in the scheme of things?

Well, quite a lot, given that interest rates are a reflection of the time value of money, as the MPC members would know if they had the sort of experience that once ran through the Bank like the silver strip in an old banknote. Centre Parcs and the footie authorities got the publicity, but the misguided decision by the MPC betrays more signs of foolish decision-making. The latest in a lengthening line, unfortunately.

30 years since Black Wednesday. Jonathan Ford and Neil investigate the build-up to the day sterling crashed out of Europe’s Exchange Rate Mechanism, and explain how the consequences echoed down the years in A Long Time In Finance.

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