George Osborne, the chancellor, has announced the repayment of debts incurred to fight the first world war, saying it was “a moment for Britain to be proud of”.
What is the government doing?
The Treasury will repay the nation’s entire first world war debt of £1.9bn from next March, nearly 100 years after it was first issued. This comes after its announcement in late October that it would pay off £218m from a 4% consolidated loan (issued by Winston Churchill, as chancellor, in 1927) in February, as part of a redemption of bonds stretching as far back as the 18th century. They also relate to the South Sea Bubble crisis of 1720, the Napoleonic and Crimean wars and the Irish potato famine.
Why is it doing this?
The Treasury wants to take advantage of low interest rates and refinance the war loan debt with new bonds – effectively IOUs issued by the government. Toby Nangle, of Threadneedle Asset Management, estimates this will save about £15m in interest payments per year, equivalent to a debt reduction of more than £500m. To put this into perspective: the Debt Management Office estimates the UK has paid £5.5bn in interest so far.
How does it work?
The Treasury will redeem the war loan bond, which pays 3.5% interest, on 9 March 2015. The bond was issued in 1932 by Chancellor Neville Chamberlain to reduce the cost of servicing the debt. It replaced the 5% war loan bond, which had been issued in 1917 to pay for the first world war (with the slogan: “If you cannot fight, you can help your country by investing all you can in 5 per cent Exchequer Bonds ... Unlike the soldier, the investor runs no risk.”)
Is there any other debt?
Aside from the £1.9bn war loan, and the £218m 4% consols bond which will be redeemed in February, there are £435m of perpetual gilts (which never mature) in the government’s portfolio.
What about other perpetual bonds?
The 4% consol bond will be the first undated bond (or gilt) the government pays back in 67 years. The Treasury says this is the start of a strategy to remove the six remaining undated gilts from its portfolio, “when we deem it value for money to do so”. These gilts include some debt originally issued in the era of the South Sea bubble in the 18th century, as well as to fund the Bank of England’s nationalisation.
Who holds the bonds?
While Fidelity and Threadneedle have the biggest holdings, the 3.5% war loan is the most widely held of any UK government bond, with more than 120,000 holders. About 97,000 of these investors hold less than £1,000 nominal, and almost 38,000 holders own less than £100.
What do bondholders think?
Threadneedle has been lobbying the government to repay the debt, and Nangle was naturally “delighted”. Ian Spreadbury, a Fidelity fund manager, said it was “clearly good news for holders of the Fidelity MoneyBuilder Income, Fidelity Strategic Bond and Fidelity Extra Income funds”. He added: “It had been something of a double-edged sword for the government – if yields drop further from here they could have refinanced it at a much lower level, so they’re giving up that option. But with yields close to all-time lows, I suppose it is important for them to lock in the benefit now.”
What did Osborne say?
“This is a moment for Britain to be proud of. We can, at last, pay off the debts Britain incurred to fight the first world war. It is a sign of our fiscal credibility and it’s a good deal for this generation of taxpayers. It’s also another fitting way to remember that extraordinary sacrifice of the past.”
