Treasurer’s reflections – Q3: Catch 22

Looking over my Q2 commentary there was little bright news to console local authority investment managers in the macro economy – plus ca change. Whilst the Eurozone rollercoster seemed to steady itself with the implicit intervention of the European Central Bank, the UK economy slipped back into recession and forecasts for any move upward in interest rates were kicked further into the long grass. Bank of England funding into the banking sector saw 3 month LIBOR fall to 0.59688% at Sept 30^th and the gap between our investment income expectations in budget setting and reality diverged further.

Many of us are caught in Catch – 22: central banks’ support of institutions makes the treasury manager wary of long term commitments, but central banks’ support of institutions is driving down yield in ‘safe’, short term investments. I am currently writing our mid year review and it’s possibly symptomatic of the times when a section on the return of Icelandic deposits appears to be the most upbeat news.

Away from investments but nonetheless linked, we are also considering our capital financing requirements in the medium term. Many authorities, faced with high perceived levels of credit risk and low real investment returns have opted to borrow internally in recent times, running down cash balances rather than take what would ordinarily be very tempting PWLB rates. However, all borrowing (external or internal) must be repaid or refinanced at some stage, and the debate at present surrounds the window of opportunity when it comes to PWLB financing. In my mind, unless or until the Eurozone can get ahead of the curve once and for all with its market adversaries(!) the UK’s sovereign currency gives it breathing space as a safe haven for some time to come.

In the meantime, the inter-authority market appears to be flourishing. Those ‘cautious’ locals seeking a little more yield above the DMO are able to find homes for their investments with those authorities looking for a rate just below PWLB equivalent in short term borrowing – now, if only we can find a way to translate those short term dates into longer term relationships? Any offers?

Mark Finnegan is Rugby Borough Council’s Principal Accountant