My report card for the Bank of England in the Covid-19 crisis

The advent of the Corona Virus pandemic has seen the Bank of England expand its activity beyond what we already considered to be extraordinary levels. There has been very little criticism I think for two reasons. Many of the new moves are not understood especially by the mainstream media and also they like to copy and paste official communiques of which there have been plenty! So let us work our way through the new policies to see the state of play.

Financing the UK government’s borrowing

Last week we looked at two factors here. The first is the QE ( Quantitative Easing) purchases which are presently running at a weekly rate of £13.5 billion and have so far totalled £35 billion in this phase. This meant that last week the UK did this.

 if we allow for the Bank of England purchases we remain net buyers of the order of £1.3 billion.

So issued debt in gross terms but via the Bank of England bought more. That looks to be a similar situation for this week as it buys the same amount and the UK Debt Management Office plans to issue some £10 billion of UK Gilts in nominal terms. The amount raised will be more than that ( the surge in the Gilt market means the majority of Gilts trade over 100) but as you can see we look to be heading for a similar result.

So we can switch now to the result. On a basic level we see that the UK government can finance itself and at quite a rate as we are issuing debt at a rate of £12 billion or so a week. This is quite a rate! Also we are able to do so very cheaply as the fifty-year yield is 0.48% and the benchmark ten-year is 0.31% as I type this.

On a more minor level let me add in the Ways and Means account which some got so excited about at the end of last week. This is because it is likely to be smaller than the amounts above. I have just asked them for this week’s update.

Corporate Bonds

This is a much more awkward area for the Bank of England. That may be why in spite of Corporate Bond purchases being ongoing its data only goes up to April 1st! Actually the use of April Fools Day is appropriate in some ways and let me explain why. Regular readers will recall that last time the Bank of England struggled to find corporate bonds to buy and ended up buying the Danish shipping company Maersk. No doubt it and the Danish government were grateful.

Well on today’s list are that well know UK technology company Apple as well as IBM. Whilst you could make a case for buying BMW via the Mini operations here will the Bank of England be racing the ECB to buy its bonds? Anyway the operation will provide us with plenty of amusement over time if history is any guide.

Covid Corporate Financing Facility

Let me open with the scale of the operation so far.

Total amount of CP purchased since 02 April
£3.626bn (data as at close 8 April 2020).

It seems worthy enough but as we look at the details I start to get troubled.

The facility is designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper.

Term Funding Scheme

This has a new incarnation as after all we must keep supporting The Precious.

Following today’s special meeting of the MPC the Initial Borrowing Allowance for the TFSME will be increased from 5% to 10% of participants’ stock of real economy lending, based on the Base Stock of Applicable Loans.

I wonder how they would define fake economy lending? We may yet find out. Anyway as is typical the help for smaller businesses is not yet in play so this is something of a fail and may yet be a grand fail as there are signs that more than a few businesses have folded already.

One thing that finally swung my partners into throwing up their hands and decide retiring was preferable was the hoops we’d have had to jump through to raise money at short notice. ( @MattBrookes3)

There are other reports of problems in funding getting to smaller businesses.

Gary Crosbie wants to keep his staff on, but like other small firms, his profitable business now faces running out of cash owing to the coronavirus shutdown.

Mr Crosbie runs Inter-Refurb, which refurbishes pubs, hotels and restaurants.

He says he can demonstrate three years of profits, with £50,000 cash in the bank.

Yet because his bank decided it didn’t wish to support the construction industry, he failed the test that required banks only to lend according to their pre-shutdown criteria. He was rejected for a government-backed loan last week. ( Andy Verity of the BBC)

There is quite a contrast here between smaller businesses who need money now but are not getting it and The Precious who still have some £107 billion from the previous Term Funding Scheme in their coffers.

Mortgages

There are mortgage holidays in play so let us look as those as after all it is the area about which the Bank of England is most concerned if its track record is any guide.

Lenders have provided over 1.2 million mortgage payment holidays to households whose finances have been impacted by Covid-19, UK Finance has revealed today.

On 17 March, just under a month ago, mortgage lenders announced they would support customers facing financial difficulties due to the Covid-19 crisis. Three weeks later, by Wednesday 8 April, over 1.2 million mortgage borrowers had been offered a payment holiday by their lender.

The action taken by lenders means that one in nine mortgages in the UK are now subject to a payment holiday, helping households across the country through this difficult time. For the average mortgage holder, the payment holiday amounts to £260 per month of suspended interest payments, with many benefitting from the option of extending the scheme for up to three months. ( UK Finance)

However that starts to look like PR spinning when we note this.

And once credit card or mortgage payment holidays end (1 in 9 of us have the latter), we’ll have more debt to pay off – because what isn’t talked about enough is that interest charges will still being calculated – and then added to the amount owed. ( @GCGodfrey)

Here is a song for the banks from Hot Chocolate.

So you win again, you win again
Here I stand again, the loser.

US Dollar Liquidity Swaps

These are proving to be a success on two fronts. Firstly US Dollars are available and secondly the amounts required have been falling. At the peak some US $37.7 billion required but as of yesterday that had fallen to US $21.9 billion.

Comment

As you can see there are various layers here. If we start with what has become the modus operandi for QE which is facilitating and financing government spending then it is a success. The UK can borrow both in size and extremely cheaply right now. That is a good idea for the crisis but of course we know that such things have a habit of becoming permanent and then the issue changes.

Next we see that larger companies will be pleased with the Bank of England action including some foreign ones. This creates problems because whilst I do not want companies to fail because of cash flow issues created by the pandemic we arrive yet again at the Zombie businesses issue. One of the reasons we spent so much time in the credit crunch was that the march of the Zombies just carried on and on and on. In this category we can class the banks because in spite of the “resilient” rhetoric and all the support we see that we are invested in Royal Bank of Scotland at around a fiver compared to a share price of £1.10.

Smaller companies will be wondering when the help will start? Let me take you back to March 26th.

Hopefully my late father is no longer spinning quite so fast in his Memorial Vault ( these things have grand names).  That is assuming ashes can spin! We seem to be taking a familiar path where out of touch central bankers claim to be boosting business but we find that the cheap liquidity is indeed poured into the banks.

As to mortgage lending we see that the banks will be getting liquidity at 0.1%, but they are piling debt excuse me help on borrowers at a lot higher rate.

So it is a patchy report card where there are successes but they are not reaching the ordinary person or business. Reality contrasts starkly with the words of Governor Carney from the 11th of March.

I’ll just reiterate that, by providing much more flexibility, an ability to-, the banking system has been put in
a position today where they could make loans to the hardest hit businesses, in fact the entire corporate
sector, not just the hardest hit businesses and Small and Medium Sized enterprises, thirteen times of
what they lent last year in good times.