By Jon Sindreau
Plummeting bond yields are enabling some cash-strapped
governments to reduce their deficits and potentially ease austerity
measures.
Spain is the trend's latest beneficiary: It sold a three-year
bond with a negative yield for the first time. That is a balm as
the Spanish government is sparring with the European Union over
missing its deficit targets.
Many yields have been pushed into negative territory. Earlier
this month, investors paid Germany to borrow their money for 10
years. The Japanese and Swiss governments had already been able to
get paid to borrow when issuing 10-year debt.
Société Générale estimates that about 40% of the reduction in
budget deficits by eurozone governments between 2012 and 2015 was
due to cheaper borrowing costs.
"For many countries it's helped them to have either less
austerity or to achieve their targets more easily," said Yvan
Mamalet, economist at Société Générale.
Central banks are largely responsible for borrowing costs' march
lower, as massive bond-buying programs in Europe and Japan drag
down yields. Central banks across developed markets have been
buying up government bonds in a bid to push yields so low that
investors look to buy riskier assets. That is meant to stimulate
inflation and economic growth.
The European Central Bank and Bank of Japan respectively buy
EUR85 billion ($93.3 billion) and 9 trillion yen ($84.8 billion)
worth of assets monthly, most of it government bonds.
Yields on government bonds have been pressured even further by
investors seeking safe places to park their money. Yields fall as
prices rise.
The British government's total interest payments were 35% lower
last year than in 2013, even though the country's debt pile had
expanded by 8%, official figures show.
"Borrowing, when the cost of money is cheap, has some great
attractions, " U.K. Treasury chief Phillip Hammond told British
broadcaster ITN. Still, he also said that the U.K. is "already
highly indebted," suggesting that the government isn't leaping into
more borrowing.
The U.K. government will consider how the economy is performing
before deciding whether to change its spending plans in its annual
autumn spending review, a British official told The Wall Street
Journal.
Following last month's vote to leave the EU, the U.K. abandoned
plans to wipe out its budget deficit by 2020 amid concern that
Brexit will hit its economy.
Analysts say that lower borrowing costs could be a crucial
factor in whether British officials decide to borrow and spend to
create extra demand in their economy.
"The timing has never been better," said Paul Diggle, economist
at Aberdeen Asset Management PLC.
The savings are also a boost to some eurozone countries as they
try to meet the EU's budget targets.
Earlier this month, EU finance ministers threatened Spain with a
fine for running up a deficit of 5.1% of gross domestic product
last year. The commission is demanding that figure fall below 3%
this year, while Spain has projected a 3.6% deficit and is seeking
more time to meet the EU's target.
In the U.S., the drop in government borrowing costs have helped
push the budget deficit down to less than 3% of GDP, where it was
before the financial crisis, official figures show.
Some economists believe that the decline in yields suggests that
the U.S. should consider taking on more debt to spend money on
things that might boost economic growth, such as infrastructure or
research and development.
Aside from lowering yields, bond-buying programs are good for
government coffers for another reason: Central banks send the
income they get from the bonds they buy back to their government's
treasuries. So governments are essentially paying interest to
themselves.
Since firing up their bond-buying programs, the Federal Reserve
and Bank of England have returned $596 billion and GBP36 billion
($47.2 billion) to their respective governments.
Central banks' role in reducing borrowing costs for their
governments remains controversial, with many economists arguing
they should limit themselves to controlling interest rates.
Developed countries keep central banks and public treasuries
strictly separated on the rationale that giving politicians access
to an institution that can print money would lead to excessive
inflation. Through much of the history of central banks, though,
they have been more tied to financing governments than
macroeconomic management.
The world's oldest central bank, the Swedish Riksbank, was
founded in 1668 as a substitute to a bank that was used by King
Carl Gustav in order to finance his war with Poland. The Bank of
England was created in 1694 to pay for wars against France and was
in charge of managing the Treasury's debt until 1997, when it was
given full independence.
The U.S. Federal Reserve was supposed to be an exception. At its
inception in 1913, it was meant to provide financial stability at
arm's length from Washington. Still, supporting the market for
government debt became its primary mission less than a year later,
when World War I broke out.
"Central banks are always hybrid, typically more government bank
in wartime and more bankers' bank in peacetime," said Perry
Mehrling, money and banking professor at Columbia University.
Many investors and analysts now expect the Chinese walls between
central banks and treasuries could be breached again. This month,
speculation has mounted that the Bank of Japan was considering a
policy called "helicopter money," by which the central bank could
directly finance government spending, despite BOJ Governor Haruhiko
Kuroda ruling out this possibility.
"Market enthusiasm for the idea of 'helicopter money' is
growing," British bank Standard Chartered said in a note to their
clients Thursday. "We believe it is no longer a taboo policy
option."
--Nick Timiraos, Richard Boudreaux and Nick Winning contributed
to this article.
(END) Dow Jones Newswires
July 24, 2016 17:53 ET (21:53 GMT)
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