Iggo, the asset manager’s head of fixed income, said the UK’s short-term debt profile has been lifted recently, although this owes to “smoke and mirrors” rather than any improvement in fundamentals.
Earlier this month, the Treasury announced that the coupon payments on gilts bought by the Bank of England’s quantitative easing (QE) programme will be returned to it each quarter. This means less government debt will have to be issued and its interest bill will effectively be reduced by one-third.
Iggo also noted that the review into how the retail prices index is calculated could see the measure move closer the consumer price index, which would ultimately lead to the Treasury seeing lower costs on the servicing of its index-linked debt.
Furthermore, the government’s outstanding debt was reduced by almost £8bn after the Treasury recently cancelled the gilts owned by the Royal Mail Pension Fund.
Iggo said: “As a result of these actions the short-term debt profile of the UK will have improved. However, it all smacks of creative accounting. In the end, the government’s liabilities have not changed that much.”
The commentator pointed out that the Treasury will have to move money back to the Bank if there is a mark-to-market loss on its QE portfolio, unwinding the effect of the coupon transfer plan.
Meanwhile, the liabilities of the Royal Mail Pension Fund have been absorbed into the government’s s general account and will to be met through current revenues in the future.
Iggo added that one or more ratings agencies could still strip the UK of its AAA status, as has already happened to the US and France.
“The rating agencies should be able to distinguish between short term smokes and mirrors and longer term structural fiscal issues,” he said.
“If growth continues to disappoint I’m afraid we are likely to go the same way as our neighbours across the Channel and across the Atlantic.”
