Wednesday, May 4, 2011

The UK has a special debt maturity profile

Paul Krugman directs us to Martin Wolf who directs us to Paul De Grauwe who shows that gross government debt as a percentage of GDP has had a similar trend in the past 5 years for Spain and Britain, but that the ten-year government bond rates have diverged dramatically.


One problem with using Britain as a Benchmark is that Britain is known to have a very long debt maturity profile which is less skewed than other countries towards short-term financing. Alphaville looked at what would happen if Britain had the same profile as the US via a BofA analyst.

Last year, Stephanie Flanders wrote about the difference between Britain and anybody else


According to the Debt Management Office, the average maturity of UK sovereign debt is 14 years. In the US, it's about four years. In France and Germany it's six or seven. Greek debt has an average maturity of just under 8 years. (...) For Greece, debt servicing costs now account for just under 12% of GDP. In the UK, it's costing less than 3% of GDP.(...)Take Germany as an example: its budget deficit in 2010 will be about 140 billion euros, whereas ours will be about 190 billion. But because of the amount of debt it has coming to redemption, Fitch, the ratings agency, reckons that Germany will be looking to issue about 386 billon euros in new sovereign debt this year. The estimate for France is 454 billion. Whereas the UK will be issuing a "mere" 279 billion. That is one reason why French CDS spreads have crept up a bit as well.

It appears that Spain has constantly increased the average maturity of ts debt holding in the past 20 years to reach 6/7 years at the beginning of 2010 . Interestingly, it is one of the only Euro-area country with a downward trend of short-term outstanding amount of debts as a percentage of total issues(also interesting: this is the case of Italy and Greece!).

Now, here is what I got on the spanish debt maturity profile from the Spain Treasury(every bar is a year)


If you look at the table for the UK via Duncan's economic blog, the Debt Management Office shows that in 2010, or if you steal the picture from AlphaVille on UK's outstanding debt


You can guess another reason why Britain and Spain do not fact the same reaction from the bond market.

I haven't read the De Grauwe paper, but a search for the word "maturity" found no match. There is mention of "liquidity", but it is mentioned relative to the fact that the money supply shrinks for a country perceived as a default risk in a monetary union(the euros can go to Germany), while this is not a case for a country with its own currency.

Anyway, I thought that the difference in debt maturity profiles are likely to be one strong factor for the divergence between the two countries.

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