Another shock faces Britain

R1.7TRN GOVERNMENT BONDS MATURING NEXT YEAR MAY NOT BE REINVESTED Amid uncertainty about British assets especially if there’s no transition deal.

On top of the risk that Britain will leave the European Union (EU) in March without a transition deal, its government faces an extra headache next year: the biggest debt-refinancing bill in recent history.

Almost £100 billion (R1.7 trillion) of government bonds will mature in the next fiscal year, when Britain needs to repay a host of bonds issued after the financial crisis a decade ago.

In normal times, that would not be an issue.

But with Britain due to leave the EU in less than four months, possibly with no transition agreement, it creates fresh doubt in an era of uncertainty for British assets that has few precedents.

Prime Minister Theresa May’s Brexit plan has been agreed with the EU, but faces strong opposition in parliament, where it will be voted on next Tuesday, raising the risk of a no-deal Brexit economic shock.

The volume of redemptions in the 2019-20 fiscal year, which starts in April, is likely to equate to 4.5% of nominal gross domestic product, the biggest share since records started in the mid-1990s, before declining in future years.

“It’s a huge refinancing exercise. It’s going to be quite a big test,” Marc Ostwald, strategist at ADM Investor Services, said.

The Debt Management Office (DMO) declined to comment.

Gilts are viewed as safe assets, with about £1.1 trillion in circulation besides those accumulated by the Bank of England to power its post-crisis stimulus for the economy.

The average maturity of gilts is about 15 years, spreading the bulk of Britain’s refinancing risk over many years into the future.

But the lack of clarity around the terms of Brexit, due on March 29, comes at an inopportune time.

Two bonds, each with more than £36 billion in issue, are due to mature either side of Brexit: first a 4.5% gilt on March 7 followed by a 1.75% gilt on July 22. Investors might seek new homes for the money flowing back to them from redeemed British government bonds rather than reinvest in gilts, depending on how Brexit turns out.

A 20-year gilt auction last month brought a hint of nervousness. The DMO had to accept low bids to an extent not seen since the height of the last financial crisis. –