Following advice from Morgan Stanley and HSBC, Wandsworth Council is planning to issue £250m of bonds in a bid to get its hands on some much-needed moolah. This is a direct consequence of George Osborne’s austerity move last year, when the chancellor pushed up the rate charged on council loans from the Treasury’s Public Works Loans Board. If Osborne’s idea was to discourage councils from borrowing then it may just have sparked some dodgy unintended consequences.
Of course, he may have saved the Government from a bit of a cash-flow issue in the short-term: council borrowing slumped to £1.5bn in the 10 months from October 2010 to July 2011 – from a hefty £5.8bn in the same period the previous year.
But the price hike is starting to appear very short-sighted, as it simply seems to have sent councils somewhere where they can get their money more cheaply – at potentially higher risk. The market rate for council borrowing could be about 0.8 of a percentage point higher than government borrowing costs, compared with the full percentage point charged by the PWLB. And when last year that body was asking only 0.17 of a percentage point, can you blame councils for going somewhere far more favourable?
They may however wish to recall our councils' prior dabblings in the financial markets. Anyone remember how helpless they were in the Iceland debacle? When Icesave went belly up, UK councils failed to get their money out, and that was from a mere online savings scheme. The risks here are far greater.
Bonds issuing has only been sporadic over the past few years, but with councils needing to raise £13bn to buy themselves out of the existing subsidy system for council houses, the Housing Revenue Account, you can’t be too surprised that analysts are expecting up to 20 councils to go to issue bonds in the next few months.
Meanwhile, the Local Government Association is looking into setting up a collective agency to issue aggregate council bonds. This could help smaller authorities raise money at a lower rate. Think of it as a similar system to the proposed Eurobond, where weaker economies could piggy-back on the the success of more powerful buddies (what a shame they haven't got the European version off to quite such a flying start).
On the flipside, it would mean local authorities having to guarantee each other’s bonds and could also need powers to hedge against variations in interest rates – just the kind of financial brinkmanship that could end really badly in a time of severe economic uncertainty…