Jupiter Merlin Weekly: Greek comedy? The joke is on us
Jupiter Merlin Weekly: Greek comedy? The joke is on us
The Jupiter Merlin team consider the cost of UK government debt (now higher than Greece’s). Do either Labour or the Conservatives offer a credible path to fiscal health?
Investment Manager, Jupiter Independent Funds/Merlin
Investment Manager & ESG Investment Director, Independent Funds/Merlin
Greek comedy? The joke is on us
It has come to a pretty pass when Greece can borrow more cheaply than we can: at the time of writing, 3.96% over 20 years’ duration for Greek bonds while the UK government is forced to pay 4.26% for 10 years; over comparable periods of 10 years, Greece’s funding cost is only 3.69%, 0.1 percentage point less than the US government is currently paying. It is within recent memory that Greece was the definition of economic dysfunction and the EU’s principal political problem child.
From life support…
Financially, Greece was all but bust and in 2015 under the new left-wing Syriza government led by Alexis Tsipras and his magnificently but manifestly bonkers (but also very entertaining) academic finance minister, Yanis Varoufakis, it was determined to kick the political traces and overturn as many apple carts as possible in Brussels. Had there been a mechanism to be able to do so, appetite was strong to have it thrown out of the club. The mechanism does not exist; in reality, excommunicating a eurozone member might itself have blown up the single currency. Instead it precipitated a full-blown, near-existential EU debt crisis as investors rapidly lost confidence in other over-indebted eurozone ‘Garlic Belt’ economies with unstable balance sheets (Italy, Spain, Portugal, nerves even about France). Until it no longer represented a systemic risk to the eurozone, at Germany’s insistence Greece’s economy was placed in special measures under control of the Troika: a supervisory cabal comprising the European Central Bank, the European Commission and the International Monetary Fund. Amid much initial domestic resistance and resentment, but with the Troika firmly holding the purse strings, a programme of deep austerity was imposed with the explicit aim of reducing the annual government deficit from over 15% of GDP to under 5%. Progress has been transformative.
…to full rehabilitation
Fast forward to today. A snap election in May 2023 saw the centre-right New Democracy party dominate the polls, only narrowly missing an outright majority. In the absence of a viable coalition, a second election will be held on 25 June. Evidenced by the fall in Greek bond yields, international investors seem unfazed; they perceive a new period of political stability and they have seen a restoration of prudential fiscal policy including four years’ worth of government surpluses between 2016 and 2019 (allowing for a brief hiccup thanks to the pandemic, and in 2022 it headed swiftly back towards budget break-even with a deficit of 2.3%, against the UK’s 5.5%). Time will tell whether that optimism is warranted or misplaced, but the contrast with the UK is marked.
The cross-over between UK and Greek bond yields occurred late in May. We have discussed regularly in these columns that the UK has failed to deliver anything other than unbroken deficits for a quarter of a century. Greece (171%) may still be more indebted than the UK (100.6%) in terms of debt/GDP but it has eight years of showing marked improvement and confronting hard choices, albeit the country had to be in extremis before the government realised the need to get a grip. The medicine has been working and currently the debt/GDP ratio is enjoying a double win: a diminishing numerator in falling debt and an increasing denominator in 5% GDP growth. Here, flirting with recession, Chancellor Jeremy Hunt continues to defer our own “eye-wateringly difficult” choices until after the election. Perhaps the Greek lesson is something from which we might learn?
The cross-over between UK and Greek bond yields occurred late in May. We have discussed regularly in these columns that the UK has failed to deliver anything other than unbroken deficits for a quarter of a century. Greece (171%) may still be more indebted than the UK (100.6%) in terms of debt/GDP but it has eight years of showing marked improvement and confronting hard choices, albeit the country had to be in extremis before the government realised the need to get a grip. The medicine has been working and currently the debt/GDP ratio is enjoying a double win: a diminishing numerator in falling debt and an increasing denominator in 5% GDP growth. Here, flirting with recession, Chancellor Jeremy Hunt continues to defer our own “eye-wateringly difficult” choices until after the election. Perhaps the Greek lesson is something from which we might learn?
The mist gradually lifts on future Labour economic policy
The UK election is now only 18 months away and the focus is beginning to turn to what Labour has in store for us. One thing that is explicitly not on the agenda so far is any commitment to reduce government borrowings before 2028. On a recent trip to Washington, Shadow Chancellor Rachel Reeves began to lay out her vision for the UK economy. Copying the same left-leaning philosophy applied by Joe Biden and his Treasury Secretary Janet Yellen (“we’re gonna go big! GO BIG!”; hold that thought), she aims to emulate the ‘green’ incentives and subsidies encapsulated in Biden’s Inflation Reduction Act with a range of initiatives including a significant investment in renewable energy and new technologies including battery-making capacity for the UK automotive industry. Unlike Biden, who however reluctantly has had to accept reality and issue new oil and gas drilling licences as a bridge between the world of old energy and the new, Keir Starmer is determined to punish North Sea oil, not only with more and possibly bigger windfall taxes but also making a flat declaration that all new drilling developments will be cancelled. Reeves’ environmental expenditure (and this is entirely separate from and in addition to all the other day-to-day government spending), financed by borrowings, amounts to £28bn a year, every year, over 5 years, a total of £140bn. Biden’s ‘green’ initiatives amount to $370bn (£300bn) but applied to an economy of $23 trillion (£18.5 trillion) and a quarter of global GDP, while the UK’s economy is £2.5 trillion, less than a twentieth of global GDP.
Definition of ‘Surenomics’: “Bidenomics’ on steroids”
It is fashionable these days to attach the suffix ‘-omics’ to the latest economic policy fad or reform (wider political ideology earns an ‘-ism’ i.e. ‘Thatcherism’, ‘Blairism’): think ‘Reaganomics’ and his monetarist principles in the US in the 1980s; ‘Trussnomics’ for the strangled-at-birth relaunch of monetarism in the UK last September; ‘Bidenomics’ for today’s debt ceiling-busting fiscal splurge at the heart of the President’s policy agenda. Rather than fall into the trap of attaching her own name to her economic programme, in Washington she optimistically, not to say presumptuously, dubbed it ‘Surenomics’. The only thing ‘sure’ about these ‘-omics’ is that if these plans come to fruition, it won’t be a case of ‘going big’, it’ll be ‘going MASSIVE!’ (as one anonymous Labour economic adviser was quoted cheerfully as saying in the Financial Times, “it’ll be like ‘Bidenomics’ on steroids”). We have previously used the term ‘arms race’ in the context of national governments competing for advantage on the path to 2050 and carbon net-zero; Reeves’ plans significantly raise the temperature and the stakes.
Last September, markets worked themselves into a complete fangle about the £2bn unfunded cost of cutting the top rate of tax by 5 pence in Kwasi Kwarteng’s budget. Now, they are being presented with the prospect of more than ten times that every year for at least four years (bearing in mind also every UK national government’s propensity a) significantly to underestimate costs on capital projects and b) to change its mind and c) to fail to manage timetables, such that one delivered on time and on budget is a revelation).
Over the past couple of Jupiter Merlin Weekly columns we have discussed whether national debt ratios matter: financial gearing in the context of GDP and how much the balance sheet can support; the ability to service the debt in the context of deficits or surpluses measured also against GDP. Andy Haldane, former chief economist at the Bank of England argues not. Our argument is that piling on more debt is no better a fillip for economic prosperity than an endless supply of toxic narcotics to a drug addict to make him feel better.
At some stage there will have to be a reckoning: either the fiscal plans will be severely curbed because the markets refuse to play ball and won’t lend the money (or the return they demand is prohibitive), or a prospective Labour government will be forced to raise taxes. Understandably Reeves and Starmer refuse politically to be drawn on that subject 18 months out from an election. But most assuredly, increases in the rates of income tax, national insurance, capital gains tax, inheritance tax, and the likelihood of wealth taxes being introduced are all being considered (something in a recent interview Labour’s Deputy Leader, Angela Rayner, declined to be drawn on but also refused to deny).
Last September, markets worked themselves into a complete fangle about the £2bn unfunded cost of cutting the top rate of tax by 5 pence in Kwasi Kwarteng’s budget. Now, they are being presented with the prospect of more than ten times that every year for at least four years (bearing in mind also every UK national government’s propensity a) significantly to underestimate costs on capital projects and b) to change its mind and c) to fail to manage timetables, such that one delivered on time and on budget is a revelation).
Over the past couple of Jupiter Merlin Weekly columns we have discussed whether national debt ratios matter: financial gearing in the context of GDP and how much the balance sheet can support; the ability to service the debt in the context of deficits or surpluses measured also against GDP. Andy Haldane, former chief economist at the Bank of England argues not. Our argument is that piling on more debt is no better a fillip for economic prosperity than an endless supply of toxic narcotics to a drug addict to make him feel better.
At some stage there will have to be a reckoning: either the fiscal plans will be severely curbed because the markets refuse to play ball and won’t lend the money (or the return they demand is prohibitive), or a prospective Labour government will be forced to raise taxes. Understandably Reeves and Starmer refuse politically to be drawn on that subject 18 months out from an election. But most assuredly, increases in the rates of income tax, national insurance, capital gains tax, inheritance tax, and the likelihood of wealth taxes being introduced are all being considered (something in a recent interview Labour’s Deputy Leader, Angela Rayner, declined to be drawn on but also refused to deny).
Reluctant investors not yet persuaded by value in Gilts
Last autumn in the budget crisis, at similar yields, fixed income investors were actively dumping UK Gilts. Today, that is not the case. Yields are still tending to rise (the corollary to which is prices falling) in anticipation of further interest rate increases thanks to sticky inflation, and the possibility that rates will stay elevated for longer than hoped. But while ostensibly a higher yield offers better value, the prevailing mood in the market suggest that unlike being prepared actively to invest in Greece, investors are distinctly lukewarm on the UK, seeing better prospects or more compelling value elsewhere than UK government debt. Such is the state of affairs when the incumbent government is perceived to be bereft of ideas and close to the end of the road, but the prospective candidate is still in the early stages of revealing its hand and so far, raising more questions than it is providing answers.
Heed Ronnie Reagan’s old mantra: “the nine most dangerous words in the English language: ‘I’m from the government and I’m here to help!’”. £140bn is a lot of government ‘help’.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
Heed Ronnie Reagan’s old mantra: “the nine most dangerous words in the English language: ‘I’m from the government and I’m here to help!’”. £140bn is a lot of government ‘help’.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
The value of active minds – independent thinking
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