The great government bond mis selling


       The public sector was willing and ready to jump on the private whenever it thought it could claim something had been missold to the investing public. There were demands for compensation, reparations and confessions. The perpetrators had to face the wrath of the Regulators.

       I do not expect there to be so much censureship of governments for misselling their own  bonds. The one thing governments are usually good at is covering their tracks or deflecting anger. We are living through a government bond crisis of some magnitude.

        Holders of Greek, Irish and Portuguese sovereign bonds have already lost much of their money. They are now told that bonds they were sold as investment grade safe products are  downgraded. In the case of Greece their junk bond status is one where the markets assume the government will not be able to meet all the payments owing on these loans.

         Holders of US and UK sovereign debt have seen the value of their holdings cut by devaluation. When they get their interest and capital payments, they will no longer buy as many Chinese or Indian goods as the money they lent to the governments in the first place.

         There are many overborrowed governments. Some will succeed in cutting spending, boosting revenues and meeting their obligations. Some will succeed in making the payments necessary, but will do so by printing more money and repaying in devalued currency. Some will fail to meet all the repayments, and will default.

         The UK official forecast assumes losses on gilts held for the next four years, as they predict rising official interest rates. After a decade of positive returns on gilts as interest rates and yields were driven down, the next next few years may not be so benign.

        I wonder what all those will be saying who recommended large holdings of sovereign bonds as safe and matching assets for various funds? I wonder what the governments that issued these bonds will be saying and doing, if the losses mount, one way or another?

       I do not expect to see much action about the big sovereign  bond swindle, which is already engulfing Greece, and could spread much wider.

        The Credit Crunch is  now entering its next phase, the sovereign debt phase. They kicked the can down the road from the troubled banks, only for it land up in the state’s backyard. The sovereigns have built a banking system based on their own borrowings. If those same sovereigns can no longer meet all the repayments at all, or without devaluing, they are undermining the very banks they claim to be suporting and regulating well.


  1. Mike Stallard
    July 16, 2011

    In religion it usually takes about 100 – 150 years for people to get to grips with new ideas. Darwin lived about a hundred and fifty years ago. So did Marx. The Death of God phenomenon and Modern Biblical Scholarship peaked about a hundred years ago.

    We now face the end of the Welfare State.It is a mad idea encouraging laziness, selfishness, denial of citizenship and insisting on suspicion of the unusual, the hard worker, and the genius.

    So I think it will die out in about 100 years’ time.

    Meanwhile, we face bankruptcy. The two crises (banks and state bonds) are, of course, the result of our international fecklessness. We Europeans gave up.

  2. lifelogic
    July 16, 2011

    Indeed government mis-selling of government bonds and bank and insurance funds mis-buying of them. This to add to Huhne’s new mis-selling of the absurd Photo Voltaic and wind turbine house Bling. Meanwhile real and sensible industry is still unable to borrow from banks for real and sensible investments. And the government is still pouring our money down the throats of the PIGIS.

    We all know how badly we are ruled but the real question is what should investors do with their money to profit from this position and also to deter governments from their insanity. Or when should they sell up and leave? How long interest rates can stay this low (nominally) and what will happen when they do rise (with the bank margins now so high too – if you can borrow at all)?

    Where to invest from this position any suggestions from anyone to beat inflation after the 50% tax?

    As I see it a good & honest Enterprise Investment Scheme with 30% tax relief is perhaps the best option if you organise a good one yourself with three investors.

    1. lifelogic
      July 16, 2011

      The more I listen to the BBC the more I tend to like Murdock – also the other BBC hate figures of Thatcher, Tebbit and Dr. Beeching (who saved us a fortune on pointless railways). Clearly they made some mistakes but in general did so much good.

      And the more I tend to dislike BBC think (pro EU, big state, equality of outcome regardless of merit, quack green science as a religion) figures like Polly Toynbee, Shirley Williams, Chris Patten, Kinnock and a vast numbers of others who have done so much pointless damage to the UK.

      1. rose
        July 16, 2011

        Not everyone at the BBC is bad. The scabs gave us some good programmes yesterday, and their English was good too.

    2. Geoff not Hoon
      July 16, 2011

      LL ” where to invest” if the statistics on rich foreigners buying top notch property west of Park Lane are to be believed, plus Mr. F1 and daughters doing the same, we should get together and buy the ‘right’ address in W1, quickly to be offered in Chinese, Indian and Arab estate agent windows!

      1. lifelogic
        July 16, 2011

        Yes the UK is good so long as you are rich and have income from overseas (and are UK resident but not UK domiciled). So that way you do not have to pay the absurd 50% income tax 28% CGT and 40% IHT. If you are rich but UK domiciled it is best just to leave.

        I see the government has found yet another way to waste money the government funded Nothing useful I could find on the site no information on the advantages of moving to tax havens or sensible offshore tax regimes, no explanations as to how the devaluing pound and high tax rates are robbing your wealth off you every day, no information of discretionary offshore trusts or how to avoid stamp duty, or how to minimise income tax, CGT and IHT liabilities.

        Nothing useful at all that I could find – not even an explanation as to why the slow (or perhaps) no recovery was caused entirely by over government, over taxation, mad green energy and general bad government all round.

  3. Alison Granger
    July 16, 2011

    Quite honestly anyone that buys government bonds or believes government promises has to be simple and deserves exactly what they are going to get. I do not expect to get a pension or any help from any agency by the time I retire as the economy will l have been run into the ground in 10 years. Lack of fossil fuels and the absence of any planning for their replacement will finish the job started by incompetence and greed.
    Buy gold and silver and hide it away from the thieving fingers of officialdom.

    1. Andrew Johnson
      July 16, 2011

      Please don’t despair Alison. Everybody scoffed and sneered when President Bush said he had great confidence in technology to overcome future energy problems. He wasn’t refering to Greenie type solutions. The world has enormous reserves of shale oil and gas. Britain has big reserves of shale oil and gas, as well as at least 500 years supply of coal (pre- Green production era).
      The real problem the West has, is that many of its “leaders” are simply over promoted middle managers, who don’t have an original thought in their head and whose priority is to get re-elected. Don’t despair about the economy either. When the real economic crisis hits us, a real leader man or woman, with vision, drive, and principles will emerge to lead us through it.
      In the meantime, do not place your trust in either of the three main parties. They are devoid of real solutions, and ignore those in and out of their parties who do. e.g why isn’t John Redwood in government?

    2. Tim
      July 16, 2011

      The fact remains that all this debt is so unnecessary. When will Governments raise taxes for essential services ONLY. Everything else should go. No taxes for any benefit overseas (EU, foreign aid =£24.5 billion net expenditure) or for foreign people (over 900,000 immigrants all requiring health and public services last year alone). We have enough problems of our own.
      Canada has this approach to the provision of its public services and got out of a debt blackhole.
      Politicians need to understand they they cannot provide every expensive public services.
      The only public service I receive is my bins emptied once a week for £184 per month!

  4. JimF
    July 16, 2011

    The worst cases of government mis-selling are:

    1 State pensions, guaranteed at age 65 until they’re not
    2 State education, guaranteed to offer social mobility until it doesn’t
    3 State healthcare, an unreliable lottery when insurance has been sold to us.

    We need a government which offers plurality, choice in these areas, and for competition legislation to apply instead of the state monopoly. Strange how the villain Murdoch can be castigated by a government whose institutions are intrusive and monopolistic.

  5. Nick
    July 16, 2011

    And what of the people forced to hold gilts?

    1. Banks for capital?

    2. Pensioners for annuities?

    1. lifelogic
      July 17, 2011

      Indeed best to leave transfer you pension overseas and invest it sensibly instead.

      1. EJT
        July 18, 2011

        How does that work LL ? ( The official guidance seems uninformative ). Thnks.

  6. Gary
    July 16, 2011

    Good analysis. There is a dawning realization that we are in dire straights. Best get some gold.

    1. lifelogic
      July 16, 2011

      Gold is not for me it gives no income and is, I think, very over priced at the moment (unlike when Brown sold the UK’s gold off).

  7. Dr Alf Oldman
    July 16, 2011

    I think that this is a good article and many investors will lose as a result of what has happened and is happening to Government bonds. Obviously, each situation is different. For example Greece is different to Ireland & Spain, with Italy & the US providing further illustrations.

    I have noticed that Russian Prime Minister Putin & Der Spiegel have been critical of the deteriorating situation in the US and the impact on the rest of the World.

    In the case of sovereign debt, it is much harder to blame the investment bankers and the bonus culture in the Financial Services industry (I am not a fan).

    In my view, the responsibility for the sovereign debt crisis sits with the:

    1. Absence of regulation of the credit rating agencies internationally
    2. Absence of regulation of the hedge funds international, especially controls over short-selling
    3. International Monetary Fund
    4. Central Bankers
    5. G7/G8 leadership

    1. Mark
      July 16, 2011

      The problem with ratings agencies is the position they have in providing “official” rubber stamping. If they were merely advisory, rather than statutory, then they would only be paid if they offered sound advice. Instead, they have been cajoled into endorsing bonds and other instruments that should have had health warnings attached, and they get paid by issuers. They seem to operate with blinkers and using a rear view mirror. Regulation is the problem – not the solution.

      1. norman
        July 16, 2011

        A perfect example being the toxic sub-prime US mortgages. They were classed as AAA+ (the US government instigated these and politically it would have been very difficult to give them anything other than the strongest rating) then when banks bought them blind, as they can do with AAA+ rated items, and it all went down the toilet we get politicians pointing fingers at ‘casino bankers’ and blaming the credit crunch on them.

        No doubt the bankers did smell an easy profit and unwisely jumped in with both feet but who wouldn’t take a free lunch when the most powerful governments in the world are telling you to stuff your face at the trough and that the era of boom and bust is over?

        Now we get politicians pointing fingers at journalists and accusing them of using underhand methods when for years now they have been briefing, both positively and negatively, their favoured journalists in private to get their spin on stories.

        You couldn’t make this stuff up.

      2. lifelogic
        July 16, 2011

        Indeed he who pays the ferry man calls the tune with rating agencies.

      3. Javelin
        July 17, 2011

        I also find Dagong gives another point of view that is with considering. They down graded the Uk and US. Germany and China have AAA ratings.

    2. Mike Stallard
      July 16, 2011

      The credit rating agencies are regulated by each other!
      If S&P says one thing and Moody’s another, then the financial whizzes can compare the offerings. It is called choice.
      The Government has behaved idiotically over the past ten years – and got it completely wrong even with the Scottish Genius in charge. Regulators are not the answer. Capitalism is.

  8. Mark
    July 16, 2011

    Your observation about gilt yields and prices is almost certainly correct. Gilts have been propped up by the statutory requirement for pension funds to invest in them as baby boomers approach retirement. As boomers start to draw their pensions this artificial source of demand will slacken as funds pay out, offsetting the new investment made for later boomers. This is yet another way in which boomers will find that their pensions are strained, and not the golden promise that people like Willetts assume.

    Of course, at the moment we have monetary policy that is designed to promote inflation and currency debasement – doubtless in the hope that the real value of government debt is devalued. The problem is that if we continue to add to the debt mountain at around 10% of GDP per annum, this policy will not work. It will impoverish us all as our economics tend towards those of the PIIGS. There will come a moment when we will have to be seen to be getting the deficit and inflation under much better control, and displaying that intention by letting interest rates rise to positive real levels.

  9. Neil Craig
    July 16, 2011

    There is a good case that such regulation should be one of the basic purposes of government Even then it should be restrained so that there is no regulation for regulation’s sake and that there is a level playing field on cost/benefits. Othwerwise we get nonsense like nuclear electricity and housing costs both being overwhelmingly regulatory.

    However when government is both regulator and the one being regulated the conflict of interest is clear and disaster is dificult to avoid. Examples would be the R101 which got its airworthiness certificate purely by political fiat and the Parliamentary “inquiry” into climategate which inquired into almost nothing and reported they had found almost nothing wrong with this government funded fraud.

  10. sm
    July 16, 2011

    I bet defined benefits pensions remain popular in the higher parts of public sector.

    The safe investments designated for others mostly in the private sector are not as good as a ‘thin air promise’ which cant be taxed or raided it seems. Why should non holders of pensions be taxed to fund them?

    We need to a maximum pot size on public sector pensions?I would suggest £500k.
    We might then get a connection with the real world, we are in it together some say?

    A universal state scheme for all sounds better than private schemes being reduced to pointlessness but alas…

  11. forthurst
    July 16, 2011

    Most of us are victims of a conspiracy between governments and banksters to take and spend our money; governments take our money to spend on themselves and on wars we don’t want and people we don’t like and services we would much rather provide for ourselves without the intrusion of their Cultural Marxist social engineering. The banksters, of course, believed by their government stooges to be the source of our wealth if not correctly their office, are the very opposite, the source of our impoverishment as they expropriate via financial engineering, lose by buying gift-wrapped toxicity, and are replenished from gilts sold back to us and so on are the intended beneficiaries of this arrangement.

    We now have the Bolshevik coup d’etat MkII: instead of the state controlling the whole of the economy and thereby creating an unstoppable downward spiral of impoverishment, the government only controls half; the other half is now available for the banksters to buy out with money they created from thin air. Of course the social policies are decided by the investors in this new terror state. That is why we have entirely open borders, the EUSSR, the promotion of multiculturalism in the classroom and on the BBC, the phony war on terror (war without end against an invisible enemy, al qaida, whose boss has had more documented terminations that a cat), false flag terror attacks against the civilian populations to instil fear and belief, similar to the medieval fear of Hellfire, the gradual elimination of the Middle classes, and more and more surveillance and thought crime laws to intimidate and subjugate us.

    The gilts misselling is yet another attack on the middle classes, whether their pension funds hold low coupon declining fixed interest securities by law or banks’ shares which will require rights to destress from government engineered weakening. Add it to the AGW fraud, designed to relocate middle class jobs to the East, the dumbing down of education to ensure that our youth will not be able to compete, and the target of these atacks are clear as anyone who keeps an eye on the USA would recognise.

    We need to have a new war: a war on the real enemy, the banksters; I note that the Chinese have been persuaded to allow an alien to invigilate their monetary policiy deliberations like the the BoE has: are we persuaded that the representatives of the banksters have not got a foot in the door when all they utter is, QE, QE, QE?

  12. Martin
    July 16, 2011

    My best “investment” at the moment is my coffee shop prepaid card. I charge it with £10 and get 50p off a cup of coffee. 5% in day! Annualise that! I also get free wifi in the coffee shop. The risk of course is the balance on the coffee shop card.

    A good example of risk management.

    1. lifelogic
      July 16, 2011

      Not good for me – I would probably loose the card after a day or two.

    2. Gary
      July 16, 2011

      First, inflation is not caused by spending money, it is caused by creating money.

      Second, printing your way out of recession is an oxymoron, since the recession in this case was caused by a credit bubble (oversupply of money/credit), and the purpose of the inevitable recession is to clean out the bad debt. Printing more in this recession makes everything worse and zombie debtors are put on indefinite life support. Keynes and Friedman were wrong on this(and much else).

      1. Gary
        July 16, 2011

        That was in reply to Ralph Musgrave

  13. Ralph Musgrave
    July 16, 2011

    The conclusion of John Redwood’s article seems to be that numerous sovereigns cannot “meet . . repayments . . without devaluing” and that this undermines those sovereigns’ banks. I think that argument has weaknesses.

    First, while banks currently hold a large amount of government debt, at least in the US and UK, banks are not legally obliged to hold ANY are they?

    Second, to the extent that banks operating in a particular country do have to hold government debt of that country, devaluation does not affect such banks. And as to the extent to which they do business in other countries, as long as banks match their holdings of the debt of different countries to the volume of business they do in such countries, again, they won’t be affected.

    Third, the more the number of countries that devalue, the more meaningless the concept of devaluation becomes.

    Also JR repeats the popular line (to paphrase) about “what happens to heavily indebted countries when interest rates rise”? My answer is “no problem”: just stop borrowing, and if stimulus is needed, just print money. I don’t see why spending £X of printed money should be much more inflationary than spending £X of borrowed money, but if it is, again, no problem. It just means that printed money is more potent stuff than borrowed money, so less of it needs to be used for a given effect.

    Both Keynes and Milton Friedman said that the “print and spend” option was a perfectly viable option in a recession.

    1. norman
      July 16, 2011

      I’m sure you know what you are talking about but several points you raise make no sense to me.

      Not having a dig, it’s just that I honestly don’t understand.

      I’ll ignore the legalistic ‘banks must hold / not hold’ stuff because I really have no clue about this, none whatsoever.

      The line ‘stop borrowing’ I don’t understand though. If a country is spending more than it takes in in tax, how can it stop borrowing? I can’t grasp that. If stimulus is needed? What if stimulus isn’t needed but the outgoings are greater than the income, as is the case with Greece. What do we do? Print money indefinitely? I really don’t see that as a solution.

      If the solution were simply for governments to print money ad infinitum and let that generate growth, generating higher tax returns, generating more growth, allowing more printing, and so on and so forth, then why has this never worked in the past when countries print moeny? Why, whenever money is printed, does bad news inevitably follow? or can you give an example when it hasn’t and the country owes substantial amounts to foreign investors?

      Also, Milton Friedman said that whenever we print money expect in 18 months time a significant bump to inflation. As for Keynes, I always thought his theory, which actually makes sense to me, was that in the good times we put a little aside and in the bad times we spend it to grease the wheels. No one can possibly think that is what has happened. We spent like drunken sailors in the good times and are now spending like drunken sailors with stolen credit cards in the bad times. I’m sure Keynes wouldn’t have approved of the situation we have now so why his name is brought up continually is completely beyond me.

      Sorry for the long post, and again, I am not saying you are wrong or right, jsut that I simply don’t see how your arguments make sense.

  14. Damien
    July 16, 2011

    The EU cannot abandon the euro for political and practical reasons. The only answer is fiscal union and the issuance of its own euro bonds. For this the treaties will have to be renegotiated and the UK must be ready with its own terms of engagement with this new structure.

    At present the most mobile residents of the EU seem to be those with least assets and in greatest need. We are paying twice through our EU contributions and again when our EU migrants arrive in need of social and welfare services.

    As austerity measures reach eye watering proportions in the periphery we can reasonably expect welfare migration to the UK to sharply increase. One treaty clause that the UK government might explore is that EU migrants no longer automatically qualify for existing benefits available to UK citizens. Clinton did it in 1996 and it was a resounding success.

    I am not aware if there is an alternative treaty being worked upon but perhaps it will be discussed here at some point in the near future.

  15. Acorn
    July 16, 2011

    Are there any institutions left that are worth believing in? Do any of those institutions give a toss what I believe in? I don’t think so.

  16. simple soul
    July 16, 2011

    What proportion of the USS pension fund will be held in bonds? Are the Ivory Towers about to fall?

  17. rose
    July 16, 2011

    I’ve said this before I know, but I think we went most wrong when we inflation-proofed the public sector, not just in their salaries and expenses, but in their pensions. What incentive was there then for them to be good stewards and preserve sound money?

  18. Badgerbill
    July 16, 2011

    I disagree with lifelogic that we are ruled. Political parties are voted to run the country, particularly where the incumbent party gets it wrong – as did Labour. No one in parliament can tell anyone what to do other than through laws that they make.

    How they run the country of course is what it is all about and those in cabinet at the moment are failing us, the tax payers daily. We can see that they have had their fingers burnt through the venality that some of them are inclined towards and their choice of associates. Friends one week and thrown to the wolves the next.

    How they deal with the financial crisis will be the making or breaking of them. Things are not looking good as they seem to be more inclined to throw our money into the black hole of the EU than make any good decisions for their own country and its people.

  19. Manicbeancounter
    July 17, 2011

    Long before a Central Government debt gets downgraded we should remember that the national debt will have risen, and along with it the debt servicing as a percentage of GDP. Downgrading increases interest rates, and along with it the debt servicing as a percentage of GDP.
    The rise in debt servicing costs as a result of increases total debt and/or interest rates implies, in the absence of real economic growth, that reductions to expenditure are greater than the original increase in unfunded expenditure that generated the debt. That is why the structural deficit that was in place before the economic downturn are so important when apportioning blame for the current fiscal malaise, along with the projected deficit if the downturn has not occurred. Greece and Portugal have similar problems to the UK and USA, in allowing structural deficits to build up in the boom year, The only difference is how far they are further down the road to actual default.

  20. Javelin
    July 17, 2011

    I don’t think any responses get the argument. They blame the rating agencies wrongly. The structure of the actual situation is that Governments make laws and those law state that Soverign Bonds should be assumed not to default and can be held as tier 1 capital. Rating agencies do not predict soverign risks they just reflect them. So if you bought Greek bonds that end up as junk – don’t blame the rating agency that they were AAA a year earlier.

    The truth is “buyer beware”. If you sink £100 million of your savers investments into bonds you need to do your due dilligence. I think there are 2 issues here. Who is to blame and what are the consequences.

    I would blame investment managers where they had the option and Governments where statutory bond purchases were necessary. I’m not sure what the ratios are here and they vary a lot depending on the country. A lot of creaseUS treasury bills were bought by China, in Italy it tends to be domestic. But a lot of bonds are held because banks have to hold them. Basel 2 means some times banks have to simply hold investment grade sovereign bonds, some times pension funds buy them as a form of lower risk investment.

    The consequences are that Basel 3 probably needs changing. I don’t really follow Basel closely but I’m sure the assumptions that sovereign bonds are safe is in there. The other big change is already that Government borrowing has increased in price, but an honesty is needed by Governments about the state of their finances. The conservatives were spot on getting the UK Government figures to be published like a set of company accounts. I think this HAS to be the way forward. Governments need to be compared with large corporates as investments in as clear a way as possible. Having a common set of standards is necessary.

    Finally what does all this say about the EU. They have been shown to be economically illiterate. What ever they say investment managers and banks must look beyond their rhetoric and unaudited accounts to the reality behind their dreams.

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