Get ready to switch off the QE boosters…

At the beginning of this year, there was a lot of concern about whether the government bond markets could absorb the record amounts of debt being issued by sovereigns. As one banker told me: ‘Governments became the borrowers of last resort. If they hadn’t been able to access the market, it would have had a huge impact.’ Indeed, it would have meant we were in a genuine 1930s style financial collapse.

But luckily, despite a failed auction here and there, sovereigns were able to access the markets and to sell trillions in debt – Eurozone sovereigns sold €950bn this year, the UK £220bn, the US $1.9tn and so on. As Paul Spurin, head of government bond trading at RBS, and vice-chair of the European Primary Dealer Association, told me: “The market has been through the biggest stress test imaginable.”

Well, get ready for an even bigger test. Sovereign issuance is likely to be at the same levels next year – but this time, without the benefit of central banks buying up most of the debt.

This year, for example, the Bank of England has bought up three quarters of all Treasury issuance. The Fed has bought up a similar amount of US Treasuries. The ECB’s Quantitative Easing programme, it turns out, is not quite as big as I’ve suggested here before, but the ECB has still lent hundreds of billions to banks at 0.5% via its liquidity auctions.

Stuart McGregor, head of public sector syndication at Bank of America Merrill Lynch, says: “There’s no question that QE has helped considerably in getting auctions done. When that stops, it will become more difficult. Everyone assumes that for debt to be sold next year, sovereigns will have to pay higher yields.”

I interviewed Robert Stheeman, CEO of the UK’s debt management office, who says he is confident that the UK will be able to meet its borrowing demands next year – he points out that yields are still at historical lows – but he’s worried about an orderly transition from a QE environment to a post-QE environment. He says: “Any big buyer distorts the market. But as the Bank slows down and yields may move up, presumably our debt will be more attractive to other investors. My main concern is that any market adjustment happens in as smooth, orderly and frictionless way as possible.”

On the positive side, the appetite for government debt is quite big, partly because the $3tn securitisation market has more or less disappeared, so there’s a lot of demand for AAA debt, even if western central banks are no longer buying.

But traders say the risk is that central banks will wait too long to put up rates, and that inflation will suddenly pick up. If that happens, expect to see demand drop suddenly for long-term sovereign bonds, at the very moment that sovereigns are trying to borrow less in short-term debt and more in longer-term bonds.

We could be in for a bumpy few months in the sovereign debt market.

China’s stimulus: after the binge, the hangover?

China won much praise (and prestige) for its prompt and bold response to the unfolding global financial crisis, announcing a fiscal stimulus package worth 14% of its GDP in November 2008, well ahead of other major economies (this compares with a fiscal expansion of 2.5% of GDP for the US, 4% for Japan and Germany, and roughly 2% of GDP for G20 countries as a whole). On the face of it, the Chinese stimulus seems to have paid off: the economy has clearly bottomed out and is once again set on a high growth course. But, as I argue in a forthcoming article in the China Environment Series – versions of which are published on Policy Innovations and Chinadialogue – there are serious concerns about the sustainability (economic and environmental) of the stimulus.

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On the web: EU top jobs, US-UK relations over Afghanistan, and modern foreign policy…

– With the new EU President and High Representative finally decided, the FT wonders whether current Commission President, José Manuel Barroso, is the true victor from all the horse-trading. The Times has news that, consistent with the Lisbon reforms, the EU is attempting to strengthen its presence at the UN. Sunder Katwala, meanwhile, suggests that European member states still lack a fundamental sense of what they want to achieve as one in the global arena.

– As President Obama continues to review Afghan strategy, the WSJ assesses the impact on US-UK relations. Con Coughlin, meanwhile, paints a more pessimistic picture of the “exclusivity of [Obama’s] style of decision-making”.

– Elsewhere, Fyodor Lukyanov heralds Mikhail Gorbachev’s idealism, suggesting he was “the last Wilsonian of the 20th century”. Richard Haass, meanwhile, explains how lessons drawn from the Cold War could help address contemporary global challenges.

– Finally, World Politics Review has a series of articles on modernising the US State Department and creating a more integrated national security architecture. The Guardian, meanwhile, surveys the UK Foreign Office’s growing “brave new world of blogger ambassadors”.

Wham! Ban (Ki-moon)! I Am A Man!

From the UN, news of another respectable initiative with a rubbish name

Network of Men Leaders

The engagement of men and boys is integral to achieving an end to violence against women and girls.

In this vein, Secretary-General Ban Ki-moon has announced the formation of a Network of Men Leaders who will work to inspire men everywhere through their commitment to eliminating violence against women and girls.

The Network will be launched by the Secretary-General on 24 November 2009 at the official UN observance of the International Day for the Elimination of Violence Against Women.

Men Leaders? I mean, how hard would it have been for UN officials to sit down and come up with a group title that didn’t sound like a camp biker gang?  Why not just “Testosterone for Peace”?  This is a serious, sensible initiative, and includes Desmond Tutu, the Spanish PM, etc.  So one might just spend 5 minutes on branding?

How we talk about climate change

At a dinner on UK climate policy last night, there were – as always – several people around the table lamenting the fact that in generally messing up on how they communicate climate change to  a sceptical public, policymakers have in particular failed to make more of the ‘green collar jobs’ argument.  Climate change shouldn’t just be presented as a problem, the argument goes; doing that just makes people feel depressed.  No, we should present it as a huge opportunity: this, after all, is Britain’s chance to make money from the jobs of the future.

I must admit, I always think there’s something a bit disingenuous about these arguments. True, some countries will do very well out of particular export sectors that emerge from the need to reduce emissions: think of the Danes and offshore wind, for instance. But all countries are talking about green new deals etc., and logically, not all of them are going to win prizes (a point particularly germane in the UK, you might think, given we’re 25th out of 27 EU member states on renewable energy; only Malta and Luxembourg perform worse).

For most countries, the realistic best case scenario is that some new jobs will be created, while some old ones will be lost. True, Britain has a small fuel cells sector that might yet go places. But if you work in aviation or steel or cement or road haulage or coal mining or any of the other sectors with a less-than-rosy future in a low carbon world, you might worry about whether your kids should follow you into the same line of work. Just to focus on the jobs being created might make you feel good, but it’s hardly the whole picture. And this is before we even consider what happens to employment if – as you might reasonably suspect – the medium to long term effect of climate change is that we all have to (gasp!) consume a bit less.

So if you’re convinced that the only way to get people to take action on climate change is to persuade them that there will be vast benefits, then it’s unclear to me that green jobs is the best place to pitch your tent.  I think instead you need to show people the money: not just the few thousand of them who get green collar jobs, but all of them, through some mechanism such as a revenue-neutral carbon tax, or a system of domestic tradable quotas (i.e. personal level emissions trading).

But I have to say, I’m not convinced that the ‘climate change is a huge opportunity’ argument has any clothes anyway.  The blockage we’re up against here is laziness, inertia and inconvenience on a large scale.  Reducing emissions is a big hassle. We know this, because even though study after study shows that it’s essentially cheaper than free for people to insulate their lofts, they still don’t.

But we’re not just talking insulating lofts. We’re talking about changing the entire energy system – how you heat your home, how you get to work, how your power is generated, how it’s distributed from there to you. It’s like the hassle involved with changing your bank, times a hundred and forty seven.  If someone told you that the quid pro quo for incurring that much hassle was the creation of 12,000 new engineering jobs in the north-east of England, you would look at them and say, “So?” 

The “opportunity” argument just doesn’t stack up against the tedious, time-consuming, expensive, unglamorous reality that will be the transition to a low carbon economy – and I think we’re doing ourselves no favours in sticking with it.

I think we need to look seriously at the last time Brits were persuaded to take on this much hassle – namely rationing, during and after World War Two – and ask how they were won over. It wasn’t about opportunity. The arguments that got them to put up with it were not about how much healthier they’d be on their new diets (true though this was). Instead, they were persuaded by a story about personal sacrifice that would make them part of a heroic shared undertaking in the face of an existential threat

And even then, they moaned like hell. Continue reading

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