© Reuters. FILE PHOTO: The spread of the coronavirus disease (COVID-19) in London
By David Milliken
LONDON (Reuters) – The Bank of England has agreed temporarily to lend money to the government to fight the spread of COVID-19 if funds cannot immediately be raised from debt markets, reviving a measure last widely used during the 2008 financial crisis.
Prime Minister Boris Johnson’s government has made historic spending and tax cut pledges to try to shield companies and workers from potentially the biggest downturn in over a century, ramping up its borrowing plans by tens of billions of pounds.
It typically borrows money direct from financial markets through bond issuance and this week investors showed a strong appetite to buy more than 10 billion pounds ($12.4 billion) of gilts, some at record-low yields.
But markets were far choppier last month, before the BoE said it would buy 200 billion pounds of debt, mostly government bonds. Thursday’s announcement allows the government to borrow billions of pounds direct from its overdraft with the BoE.
“As a temporary measure, this will provide a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from COVID-19,” the BoE said in a joint statement with the finance ministry.
The BoE said any government borrowing from its Ways and Means facility would be repaid by the end of the year.
BoE Governor Andrew Bailey has previously said the BoE will not engage in “monetary financing” – the permanent funding of government spending, linked to hyperinflation in post-World War One Germany and more recently in Zimbabwe.
Bailey defended the BoE’s existing quantitative easing as a way to keep inflation on target and said action to ensure smooth market functioning was also within the BoE’s remit.
The government’s overdraft at the BoE currently has borrowing of 400 million pounds, and usage previously peaked at 19.9 billion pounds in 2008.
“The government will continue to use the markets as its primary source of financing, and its response to COVID-19 will be fully funded by additional borrowing through normal debt management operations,” Thursday’s joint statement said.
British government bond markets opened little changed after the announcement.
RECORD DEBT ISSUANCE
The government’s Debt Management Office is due to publish updated debt issuance plans on April 23, and some economists predict the budget deficit this financial year could rise above 10% of GDP, its highest since World War Two.
Market strategists at Citi estimate the government may need to sell a record 285 billion pounds of bonds this year to finance new spending and refinance maturing debt, almost double what the DMO sold last year.
Philip Shaw, an economist with Investec, said lending by the BoE would only count as monetary financing if the government does not swiftly repay any borrowing as agreed.
It was not immediately clear if the facility would purely be used if markets seize up, or if the government intends to borrow from the BoE to smooth the path of bond issuance over the course of the next 12 months.
Britain had little trouble raising funds from markets during the last financial crisis.
But Shaw said the government’s need to fund programmes such as one to pay 80% of the wages of workers at risk of being laid off, as well as the deferral of some tax revenues, meant its short-term cash needs would be hard to predict.
Bond issuance plans are normally set out three months in advance, though the DMO acted more rapidly last month to announce a record 45 billion pounds of debt issuance for April, the first month of the new financial year.
“It’s the lumpiness and the scale of the outlays,” Shaw said. “The likely motivation for this move is really to give the government as much flexibility as possible and actually give it the cash that it needs to combat the economic effects of the coronavirus,” he said.
(Additonal reporting by Kate Holton; editing by Guy Faulconbridge and Nick Macfie)