Debt, Governments and Money Pits

The UK’s decision to hike taxes and put a sticking plaster on the cash-haemorrhaging NHS highlights serious issues for Soveriegn Debt Investors. Expectations on interest rates and currency markets are one issue, but the competency of governments to manage the quantum of debt raised through the pandemic and avoid rising uncertainty will be increasingly under the microscope.

Blain’s Morning Porridge – 9th September 2021: Debt, Governments and Money Pits

“The NHS is the closest thing the English have to a religion.”

This Morning: The UK’s decision to hike taxes and put a sticking plaster on the cash-haemorrhaging NHS highlights serious issues for Soveriegn Debt Investors. Expectations on interest rates and currency markets are one issue, but the competency of governments to manage the quantum of debt raised through the pandemic and avoid rising uncertainty will be increasingly under the microscope.

As I predicted last week, the autumnal debt season is shaping up to be among the most frothy bond issuing binges ever. Corporates are raising as much debt as possible – trying to fund ahead of any taper and rate rises. The investment banks are bidding up for mandates and trying to persuade asset managers’ fixed income desks the bond buying rally has further to go – and “don’t worry” what normalising interest rates might do to bond portfolios. (Clue: rising rates will destroy the bond values – simple as.)

Waiting in the wings we’ve got China’s likely Lehman moment – the default of property ponzi firm Evergrande is just around the corner. How the Chinese authorities chose to respond will be “interesting”, and will no-doubt trigger waves around markets.

It remains equally busy in the sovereign debt markets, where the commentariat – which has never really understood the subtlety of fixed income markets – are united in their belief soaring national debt is going to come back and bite us all hard. They say current issuance is unsustainable, will trigger weakness and default, causing the collapse and end of everything..


In coming years the major nations of the West will all face enormous challenges, hard choices and rising levels of doubt. But, after 36 years plus in fixed income markets, I’m not so much worried about the pandemic debt load.

It’s not the quantum of debt that matters – it’s the competency of government and what they do with the money that matters. Global sovereign credit investors understand the elevated debt levels aren’t the crisis. Any mildly competent financially sovereign nation can print on as much money as they care to. Governments have successfully hiked debt levels to win wars many times through history.

What happens next in Sovereign Credit will be a classic “Three-Body Problem Plus”. Working out how the complex inter-reacting forces of debt, trade, geopolitics, inflation, rates, credit and domestic politics are going to interreact will likely prove impossible to predict.

Sovereign Credit investors and issuers should get ready to swim in an increasingly turbulent flow.

There was once a time when the only thing to worry about in Sovereign Credit was interest rates. Because countries famously “didn’t default”, all a bond trader had to do was look at where interest rates were headed based on growth and inflation expectations, what the central bank was not saying, consider how that would impact FX, (nations with high interest rates attracted flows pushing down rates), and place their bets accordingly.

Then nations started defaulting – largely because they borrowed in other currencies, and FX  markets sold nations who dared to print own money to cover FX liabilities, creating a run-away inflation feedback loop, and crashing confidence. Traders soon learnt the Sovereign Credit market is really only about nations that retain their own financial sovereignty.

Now the market is more complex. For Central Bankers and National Debt Management Offices it looks binary:

  1. Central banks weighing up continuing QE (bond purchase programmes) to keep rates low by buying the bulk of national debt issuance to fund economies, with the negative side effect of continuing the negative consequences engendered by distorted low yields.


  1. If rate repression is tapered and rates normalise, nations will have to start paying REAL market rate for their debt, triggering a host of other consequences.

The debt future is going to hurt some nations more than others.

Some nations – like the US – have an unfair advantage. No matter how stupid Donald Trump, or how hapless Joe Biden, how disconnected the Capitol is from reality, the US has the deepest and most liquid bond market on the planet – Treasuries – and the world still revolves around the dollar. The USA’s place in the global economy ensures it remains the “flight to quality” debt choice – for now.

In contrast, Europe’s government bond markets are history. The member states of the Euro are no longer financially sovereign. They are credits – some are good, others are not. Would you buy Italy if it wasn’t backstopped by the ECB? Euro members have surrendered their ability to determine their own fiscal and monetary policies. They can’t print money without Brussels. No matter that German govt bonds have negative yields, but ECB QE means the liquidity in Bunds is minimal because the ECB owns the market. The sooner the EU just ends national debt and mutualises it into one issuer (itself) the better – its happening.

Other Financially Sovereign nations will have to swim in a more torrid current where their place in the geopolitical landscape is tested, their trade probabilities are weighed, and most importantly: how competently nations deal with the consequences of ultra-high debt levels.

Investors in debt and the FX markets will shun nations where political uncertainty, competency and credibility are seen to be serious concerns likely to impact the level their bonds trade.

The UK may be among the first nations put in the sovereign credit hot seat.

Earlier this week the Boris government broke election pledges to announce £12 bln of new taxes  – via national insurance (a regressive tax hitting the poorest most heavily), and dividend income hikes, to cover yet more shortfalls in the National Health Service. Notionally, some of that money is also going into improving social care….  But the NHS has a voracious maw.. “Feed Me! Feed Me!” it screams.

At the foot of this morning’s Porridge I’ve added an outline of the NHS problems.

The key takeaway of yesterday’s UK parliamentary “debate” was to highlight the NHS tax-rise and spending promises are just a short-term sticking plaster on a pustulated sore. Its anything but a long term solution. The NHS accounts for some 40% of government spending – yet its likely the extra-money this extra-tax has raised will cover a fraction of its massive cash needs.

Moreover, if the government demonstrates such ineptitude in its handling of NHS funding – why should we expect it to do any better with the really big stuff?

When it comes to the NHS the UK does not a lashed-up string and sealing wax fix! We need the NHS rebuilt, reinvented and made fit-for-purpose. At a time when the global debt buying world is looking at the UK and wondering about the uncertainty of the post-Brexit economy, our efforts to clinch new trade agreements, our relationships and place in the post USA-hegemonic world, and our economic prospects, you can immediately appreciate how many may be worried about our Government’s ongoing credibility.

Perhaps, fortunately for the UK we have Sajid Javid as Minister of Health. Javid is a good man to be running the NHS. He might be the shortest-lived UK Chancellor on record -resigning rather than surrender his advisors to Dominic Cumming’s oversight- but he has actual business experience as a banker prior to becoming an MP.

I am sure he knows the time for sticking plasters is over. The Beveridge Report in 1942 set a vision for the UK’s Health, Pensions and Welfare. It won the UK the war by clearly setting out to servicemen the future they were fighting for. Their support for the plan cost Churchill the post-war election. What Javid should be putting in place today is not another slapdash filler job on the NHS’s cracks, but rebuilding it from the foundations up, to incorporate modern medicine, technology and demographics.

If it was doable in 1948 – why not today?

Out of time… and back to the day job..

Bill Blain,

Strategist – Shard Capital


For the benefit of foreign readers:

Let me try to explain the National Health Service. It is a source of great national pride – first proposed by the wartime Beveridge Report into health and social care in 1942 and enacted by the Labour Government in 1948. The NHS offers free health care to the whole nation. It is the largest single employer in Europe.

It is very big – but not terribly efficient or modern and consumes an enormous quantum of cash. Any serious employer offers private health care as an employment benefit so workers can beat the NHS queues and get treated in pristine private hospital rooms.

The Pandemic and NHS became tied at the hip. It wasn’t likely deaths, or inflection numbers rising, but the threat of the NHS being swamped that drove the UK government’s lockdown thinking. The devasting economic consequences of closing the nation for 18 months played second fiddle to the potentially politically painful optics of patients left to die on the streets.

During the early pandemic we clapped the NHS every Thursday night. While the rest of us cowered in our home offices, the history books will record Covid was fought to a standstill by brave medical staff in the wards of British Hospitals.


But sadly, the NHS has become a voracious money pit.

It has not aged well. It may be a national treasure, but like much of the nation it has aged badly. What was fit for 1950’s Britain doesn’t meet the needs of a modern UK. The NHS now consumes over £2500 per annum on a per-capita basis – it spent £212 bln in 2020/21 – after a £60 bln spending hike to fight the pandemic, much of it spent (or squandered?) on protective gear, test and trace and paying private hospitals to provide care. Prior to yesterday’s announcement, the NHS got a further £20 bln for this year’s spending.

It is regularly reviewed, but successive management dither has left it institutionalised, resistant to change, bureaucratically hamstrung, and technologically illiterate. On the other hand – NHS staff saved my life in 2016 after a botched operation (done on private medical insurance) went wrong resulting in a massive cardiac arrest. Thank you NHS.

Every year the NHS budget goes up – usually above inflation – and health chiefs say there isn’t enough money to fund everyone. (Great headlines in Torygraph this morning about 43 new NHS management jobs, each on about double the Prime Minister’s salary!) Year by year the queues grow, the service deteriorates, and horror-stories of neglect multiply. One problem is Britain’s health care problem are the elderly who just don’t exhibit the common decency to die relatively young and healthy. Instead they get old, and die slowly of old age; dementia, cancers, respiratory failure and heart disease.

Yesterday, the Minister for Health, Sajid Javid was on Radio 4 commenting on the backlog of 5.5 million Brits waiting for hospital operations. He expects a further

7 million UK citizens who avoided going to hospitals or their General Practitioner last year because of the pandemic will now “bounce” in the doors. How many of them will present with now incurable cancers, cardiac or raspatory problems is unknow – but it will be significant. Many doctors fear the true Covid death toll will double when undiagnosed illness are counted.