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The UK has a debt problem

The UK has a debt problem

And it won’t be easy to fix

Long stories short

  • UK house prices dropped for the third month in a row.
  • Japanese workers saw their pay rise at the fastest rate in 28 years.
  • Six more women claimed that Crispin Odey sexually assaulted or harassed them.

Index jinxed

On Tuesday the chief executive of the UK’s water utilities regulator told the House of Lords investors were “concerned” about whether the heavily indebted Thames Water could be rescued. 

So what? David Black deserves a prize for understatement, if not regulatory brilliance. Thames Water is not alone. Having let the inflationary genie out of the bottle and sent interest rates after it, the UK is sitting on mountains of debt it will find hard to service. To stretch the metaphor there are

  • foothills of debt in households facing higher mortgage and consumer credit costs;
  • uplands of debt in companies, utilities, local authorities and universities having to restructure loans acquired during a decade of cheap money; and
  • an Everest of debt on the Treasury’s balance sheet, groaning under the weight of the UK’s outlier strategy, since the 1980s, of linking up to a quarter of government bond yields to inflation.

That 25 per cent compares with 8 in the US and less than 5 in Germany. It was meant to encourage policymakers and the Bank of England to keep inflation low. Last year they failed and consequently UK public net debt service costs for the 12 months to May totalled £109 billion, equivalent to 68 per cent of the NHS budget.

More numbers

£15 billion – extra debt service cost to UK exchequer for every percentage point interest rate increase

4 million – owner-occupier mortgage-holders the Bank of England expects to be exposed to rate rises this year

12 – percentage decline in London mortgage-holders’ average disposable income as a result

6.7 – equivalent figure for the North, Midlands and south-west

75 – percentage share of average wage-earners already struggling with unaffordable debts, according to Hargreaves Lansdown’s savings and resilience barometer

More debt

Utilities. Thames Water’s £14 billion debt pile – acquired mainly by its former Australian owner Macquarie – is exceptional in that for now it’s the only privatised water company unable to persuade investors to keep it afloat. But ten others are over-leveraged according to the regulator’s rules and the sector as a whole is carrying debts of £65 billion, half of which are inflation-linked…

  • limiting funds available for investment;
  • raising the risk of more sewage spills to add to the 300,000 recorded last year; and
  • driving up bills.

Corporates. In its latest financial stability report, the Bank of England warned that many UK companies were vulnerable to high leverage. That was last December. The Bank has since raised rates five times, from 3 to 5 per cent, adding tens of millions to interest bills for Aston Martin, Asda, Morrisons, Heathrow Airport Holdings, the AA and many others. None are in existential danger but all are hurting and will have to pass on pain to customers. Many are especially vulnerable to inflation because UK companies account for a third of all index-linked corporate bonds. 

Universities. They’re fighting unions’ pay demands, partly because they too are over-leveraged and few have Oxbridge-style endowments to tide them over. Among those most exposed to rising rates are Oxford Brookes (where borrowing relative to income is at 92 per cent), Cardiff (67), Bath (62) and Southampton (60).

Local authorities. Last month Woking joined Thurrock, Croydon and Slough on a list of councils to have run out of money because of bad investments and the rising price of debt. With core funding of £16 million, Woking built up debts of £2.6 billion and a deficit of £1.2 billion. Total borrowing by UK local authorities stands at £134 billion; the list is likely to get longer. 

Homeowners. As of the latest rate rise, the Institute for Fiscal Studies estimates that 60 per cent of UK mortgage-holders will be spending more than a fifth of their income on housing, up 36 per cent overnight. Average mortgage-holders’ monthly outlay on interest and capital went up by £150 in Northern Ireland, £390 in the south-east and £520 in London.

Next up? Schroders expects rates to peak later this year at 6.5 per cent. Board directors who’ve paid off their mortgages may want to

  • empathise with key staff aged 30-49 who haven’t; and
  • batten down the hatches. 

Yesterday the Treasury’s Debt Management Office sold £4 billion of two-year bonds at the highest yield in 16 years (5.668 per cent). That is well above the yield on longer-dated bonds. For wonks, the yield curve is inverted. For the rest of us, recession warning signs are flashing. 

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