Monthly Archives: July 2013

UK Creditors: Lenders to HM Government

The British Government borrows money by selling bonds, the bonds are known as ‘gilts’. Approximately £120 billion a year, the UK Government is borrowing to meet the short fall in tax revenue and government expenditure. (the budget deficit)
These GILTS are sold at regular auctions held by the UK Debt Management Office (DMO), to raise money for the UK Government, HM Treasury. These bonds are then traded on the bond market.


The DMO publishes a quarterly report that shows who currently owns the UK’s debt, summarized below.

39.8% Insurance Companies and Pension Funds
35.1% Overseas Investors
17.8% Other Financial Institutions
2.9% Households
2.9% Banks
1.5% Others.

Although the majority of gilts are held by British institutions, as you can see from the table above, 35% of our creditors are overseas investors. Thus effectively we are depending on the confidence of foreign investors to lend the UK money, and for the creditors to get their money back. The risk going forward is that once the UK gets into even more debt, confidence in the ability of the government to repay the outstanding debts falls.

The best analogy is in day to day life, would one like to lend money to a heavily indebted person ? The risk of getting one’s money back always increases when carrying a lot of existing debt.

UK Investor: Legal & General PLC

Legal and General PLC is one of the UK largest insurers and money managers.

The Chief Executive, Dr. Nigel Wilson was interviewed on BBC Radio’s 4 The Bottom Line []

The Podcast for the interview is []

Looking at the 256 page Annual Report of 2012, one soon realises the importance of Legal & General PLC
page 4: £406,000 million under management = £406 Billion

page 4: One of the largest investors in the UK stock market with responsibility for approximately 4% of all London-listed equities [yes, owns 4% of most UK listed companies]

page 8: 705,000 pensioners depend on Legal & General for pension income

page 9: Fiscal austerity – the UK Government has debt of over £1 Trillion, and an unsustainable deficit of £120bn
Page 11 is the most worrying set of data for society:

The ageing of most western populations poses considerable challenges for governments. in the UK, by 2030, over-60s will have grown from 22.6% of the population to 27.8% in just 20 years and the average 60-year-old woman will live until 88. Longevity and an ageing population are impacting UK government policy in three significant ways:

• The reduced ratio of the working population to the retired population makes it difficult to raise sufficient revenue from income-related taxes to finance central spending. This has been partially remedied by raising the retirement age.
• The state finds it difficult to finance retirement pensions. Solutions for this problem include the encouragement of private pension saving and changes in the retirement age and state pensions.
• Central government and local authorities are already finding it difficult to finance the costs of social care for elderly people. While the current generation is potentially able to contribute towards the costs through releasing housing equity, future generations may find this more difficult.

page 102: Largest 3 shareholders:

Schroders Plc  5.0%
BlackRock 4.9%
AXA S.A. 4.3%

page 151: Cash and cash equivalents include cash in hand, deposits held at call with banks, treasury bills and other short term highly liquid investments with original maturities of three months or less: £2,057 million = £2.057 Billion.

A well-oiled, efficent and highly liquid company, and the major investor in UK PLC.

The HSBC Trading Position

HSBC, “the world’s local bank” has its annual report at [] is only 544 pages.

Trading has had a lot of negative publicity post the global financial crash. This is where bank’s use their own money to work the money markets and take positions (risks) on the price of commodities, currencies, shares, bonds, other financial instruments. etc etc. This is known as Proprietary Trading. The reason for this “prop trading” to be seen as controversial is, that is the bank gets into trouble and makes huge losses on bad risk decisions, the tax payer is on the hook to bail out the bank.

Page 374 onwards is the Balance Sheet of HSBC and what is interesting to see, is the trading exposure of the bank.

Trading assets of £408,811 million = £408 Billion
Trading liabilities of £304,563 million = £304 Billion

These assets are broken down on page 436.

They are the assets the bank trades with each day, of which Debt securities made up £144,677 million (£144 Billion), these are fixed income instruments.

Good to know, that the bank has a very strong position with more trading assets than liabilities, thus it is able to meet all liabilities.

Detroit Bankruptcy

The history of city of Detroit could be explained in earlier years with words like Motown Records or the power of the US Auto Industry. Today one thinks of Detroit as the film setting for Robocop (…please put down your weapon, you have 20 seconds to comply…) and the decline of a great city. Now today in a mess, it has declared bankruptcy. In the bankruptcy petition, it states 100,000 creditors make up the £12 Billion (US$18 Billion).

But who are the creditors who are owed £12 Billion ?

They are all the names of all of the city’s active employees & its retirees, a list of properties that have tax claims with the city, numerous bondholders such as municipal bonds issues by the city of Detroit, business creditors and companies that also insured Detroit debt. The single largest creditor is the city’s general pension scheme, which is owed $2 billion.

The facts will be resolved in the law courts, as the bond holders (creditors) will be offered some level of compensation for their losses (non payment of interest and principal capital), that will result in some sort of agreement, where the creditor is given something like 25 cents on the $1 owed, or something like that.

So what theoretically means, is that someone who lends Detroit money by buying bonds from Detroit (Detroit issues bonds to raise cash), now faces the prospect of losing (in my example) 75% of their capital. The risk going forward with that, is it takes a brave lender to lend to Detroit in the future, based on non-payment and bankruptcy of the past. This is best explained with the bankruptcy of Argentina in 2002. Defaulted on its debts, offered its creditors 10 cents on the Dollar, and has never been able to borrow on the international bond market. Frozen out of the capital markets.

UK Government Tax Revenue

The tax that the UK government hopes to collect in tax year is roughly as follows:

Income Tax of £155 Billion
National Insurance of £106 Billion
VAT of £102 Billion
Others Revenue £84 Billion (Radio Spectrum Auctions, Oil Leases, Petroleum Tax, Road Tax, Stamp Duties, Capital Gains Tax etc…)
Excise Duties £48 Billion (Tobacco, Alcohol)
Corporation Tax £45 Billion
Business Rates £26 Billion
Council Tax £26 Billion

∑ (£155 + £106 + £102 + £84 + £48 + £45 + £26 + 26) billion

Equates to about £592 Billion.

Yet this is not enough, spending commitments (Pensions, NHS, Defence, etc etc) of over £700 Billion means, the UK Government need to borrow on the Bond Market via Gilt Auctions, a further £120 Billion a year.

UK Universities Pension Scheme (USS)

The UK Universities run a pension scheme called, The Universities Superannuation Scheme (USS).
[]. After the BT pension fund, this is the 2nd largest pension fund in the UK.

It has £34 Billion in assets, £34,000,000,000. It is very interesting to see the top 100 holdings.


The top 5 investments are

1 HSBC HOLDINGS £466.20m
5 BP £235.90m

Why ?

These 5 firms are generous dividend payers.

1. HSBC yields 4% = £18,648,000 dividend income for USSC 
2. ROYAL DUTCH SHELL yields 5.1% yield = £23,398,800 dividend income for USSC
3. VODAFONE GROUP yields 5.3%. yield = £18,216,100 dividend income for USSC
4. GLAXOSMITHKLINE yields 4.3% yield = £11,154,200 dividend income for USSC
5. BP yields 4.7% yield = £11,087,300 dividend income for USSC

Good dividends to pay the pensions to the deserving retired academics.

Interesting fact that if you add up the top 5 investments:
∑ (£466,200,000 + £458,800,000 + £343,700,000 + £259,400,000 + £235,900,000)

= £1,764,000,000 (£1.764 Billion)= 5.18% of USSC Assets.

Lloyds Banking Group Annual Report

The 2012 Lloyds Banking Group Annual Report makes good reading.


Only 372 page, but some salient points can be found, if you dig deep

Page 2: Total wholesale funding reduced by £81.6 billion to £169.6 billion;[money it needs to bridge the gap from deposits to loans]

Page 6&8: Brands: LloydsTSB, Halifax, Bank of Scotland, Cheltenham & Gloucester, Birmingham Midshires, Intelligent Finance, Scottish Widows, Lex Autolease.

Page 14: Targeting further reduction in total costs to around £9.8 billion in 2013 [more automation /job cuts and perhaps asking strategic vendors to do more for less…]

Page 29: Lloyds Banking Group has retained our position in the FTSE4Good socially responsible investment index

Page 44: the core loan to deposit ratio of 101 per cent at the end of 2012 now very close to our long-term target of 100 per cent.[today for every £100 on deposit, £101 is on loan, thus the need for £169.6 billion for wholesale funding]

Page 50: Customer deposits £422.5 billion (£422,500,000,000)

Page 63: Funds under management increased by £7.1 billion to £189.1 billion primarily driven by improved investment markets. Inflows have increased in the year primarily in St James’s Place. However this was largely offset by a reduced level of inflows in Scottish Widows

Page 124: HM Treasury currently holds 39.2% of the Group’s ordinary share capital. (UK tax payer owns 39.2% of Lloyds Banking Group)

Page 158: During the year, the Group drew €13.5 billion (£11.2 billion) under the European Central Bank’s Long-Term Refinancing Operation facility for an initial term of three years, to part fund a pool of non-core euro denominated assets. (borrowing from the ECB)

Page 170: Trading portfolios: The Group’s trading activity is small relative to its peers and the Group does not have a programme of proprietary trading activities

Page 208: Balance Sheet: Total assets £924,552 million = £924 Billion = £0.954 Trillion
Page 208: Balance Sheet: Loans to Customer £517,225 million = £517 Billion = £0.517 Trillion

The UK 2012 GDP was £1,541,465 Million = £1,541 Billion = £1.541 Trillion

Thus Lloyds Banking Groups assets = 60% of the UK 2012 GDP. The bank is vast.

The World’s Largest Companies: Top TEN

A way to value an organisation, is to examine the cash generated in a 12 month period. This then shows the annual revenues.

Based on this methodology, here are the top 10 corporations in the world based on annual revenue at the end of 2012:

The world’s largest companies based on £ revenues.

1  Royal Dutch Shell £315 Billion [OIL] (UK & Netherlands)
2  Wal-Mart £307 Billion [RETAIL] (US)
3  Exxon Mobil £294 Billion [OIL] (US)
4  Sinopec £280 Billion [OIL] (China)
5  China National Petroleum £267 Billion [OIL] (China)
6  BP £254 Billion [OIL] (UK)
7  State Grid £195 Billion [POWER] (China)
8  Toyota Motor £173 Billion [CAR & TRUCK] (Japan)
9  Volkswagen £162 Billion [CAR & TRUCK] (Germany)
10 Total £153 Billion [OIL] (France)

Interesting to see how energy companies dominate the top 10, also note, that no banks are in the top 10.

The World’s Largest Banks: Top Ten

One way to look at the size of an organisation, is to value the size of the business based on its market capitalisation (shareholder value) which is the number of shares in the company multiplied by the share price, this gives the overall market valuation.

Another way to size the enterprise, is to base the valuation on the size of the balance sheet. Based on this methodology, here are the top 10 banks in the world based assets at the end of 2012:

1. Industrial & Commercial Bank of China (ICBC) £1853 billion. [China]
2. HSBC Holdings £1774 billion [United Kingdom]
3. Deutsche Bank £1756 billion [Germany]
4. Crédit Agricole Group £1753 billion [France] 
5. Mitsubishi UFJ Financial Group Japan £1710 billion [Japan]
6. BNP Paribas £1665 billion [France]
7. Credit Agricole £1609 billion [France]
8. Barclays PLC £1582 billion [United Kingdom]
9. JPMorgan Chase £1555 billion [USA] 
10. Japan Post Bank £1510 billion [Japan]

When you added these numbers together:
∑(£1,853bn + £1,774bn + £1,756bn + £1,753bn + £1,710 + £1,665bn + £1,609bn + £1,582 + £1,555bn + £1,510bn)

= £16,767 billion = £16.7 Trillion.

The top 10 banks in the world hold £16.7 Trillion worth of assets.

The UK National Debt

In 2009-10 the Government spent £671.4 billion of our money, despite tax revenues of only £496.1 billion. [Thus a deficit of £671bn – 496bn = £175 bn, that £175bn short fall comes from borrowings]

This issue of spending more (government expenditure) than comes in (taxation) has been going on for years.

In 2011-11 the UK Government had to borrow £120.9bn (a budget deficit of £120.9bn)
In 2012-13 the UK Government had to borrow £119.5bn (a budget deficit of £119.5bn)
Project In 2013-14 the UK Government had to borrow £120bn (a budget deficit of £120bn)

As you can see, run up a deficit each each of £120bn each year for a few year years (borrow £120bn each year from the Bond Market) and the debts run up…..

When you add up all the borrowings, you get to about £1.2 Trillion

Yes, total debt is about £1,200,000,000,000 (£1,200 Bn = £1.2 Trillion)

In 2013-14, interest payments on the total national debt will be about £48 billion (£48,000,000 Million

Brazil in BRICS

It was Jim O’Neill of Goldman Sachs Asset Management who coined the term BRICS, when we was referring to the growth in the emerging market countries of Brazil, Russia, India, China and South Africa. In recent weeks one has seen an up rising in Brazil. Street demonstrations that hit Brazil last month began as opposition to transportation fare hikes, but have spread to include protests against a wide range of grievances, including the high cost of the World Cup and Olympics with the spiralling cost of living. The middle class are clearly feeling squeezed.

Latin America has seen a huge expansion in economic growth, with China buying raw materials from Brazil. Today Brazil boasts some of the largest companies, the banking giant Itau, Vale [] a top four miner in the world and Petrobas [] one of the world’s largest oil companies. Also Brazil has a mature aerospace industry too, with Embraer []

Latin America has a growing middle class that are now becoming consumers, just like India and China. The issue in Latin America as in other emerging markets is the gap between rich and poor that is causing social problems and the need for efficient transport systems that are dependent on a more robust infrastructure.

Retail investors can get access to investment opportunities in Latin America with funds like this from Invesco Perpetual:

Dual Listing of Shares

When a company’s shares are listed on more than one stock exchange for the purpose of adding liquidity to the shares and allowing investors greater choice in where they can buy or trade their shares.

HSBC has its shares listed on the London Stock Exchange (LSE), The Hong Kong Stock Exchange, The Paris Stock Exchange and the New York Stock Exchange.
Standard Chartered has its shares listed on the London Stock Exchange (LSE), the Hong Kong Stock Exchange and The Bombay Stock Exchange.
BHP Biliton is listed on the London Stock Exchange (LSE) and the Australian Securities Exchange (ASX)
Shell has its shares listed on the London Stock Exchange (LSE) and the Amsterdam Euronext and the New York Stock Exchange (NYSE)
Unilever has its shares listed on the London Stock Exchange (LSE) and the Amsterdam Euronext.
Shell as a more complex capital structure, with Shell being made up of 2 classes of shares Shell A (class A) and Shell B (class B). Class A shares and Class B ordinary shares have identical rights, except related to the dividend access mechanism, which applies only to the Class B ordinary shares. This is due to different tax mechanisms on dividends in the UK, USA and The Netherlands.

The Wealth From North Sea Oil

UK Crude Oil has played a major role in the UK economy during the 1970s and 1980s for two reasons:

[1] The price of oil has fluctuated dramatically.

[2] Due to higher oil prices, there has been large-scale expansion in investment in North Sea oil production, resulting in the UK becoming a major oil-exporting nation.

The first North Sea oil came ashore in June 1975 and is thought to have peaked in 1999, with more than 40 billion barrels extracted so far. Brent Crude is $108 a barrel. So a very “crude” calculation of this value (ignoring inflation and the historical oil price):

$108 x 40,000,000,000 =  $4,320,000,000,000 = £2,853,220,000,000
£2,853,220,000,000 =  £2.853 Trillion = £2,853 Billion = £2,853,200 Millon

Oil production was negligible before 1975 but by 1980 it had risen to 603 million barrels per annum, 2.6 per cent of world production. Output from 12 crude oil fields  average 2 million barrels per day. So with Brent Crude at $108 a barrel:

$108 x 2,000,000 = $ 216,000,000 = £142,661,000 a day
£142,661,000 = £142.611 million

The 4 major North Sea oil fields are Brent, Forties, Oseberg and Ekofisk (BFOE). They are set to pump around 1,000,000 (1 million)  barrels per day.
A “crude” way to value the North Sea to the UK is to look at the value of Shell and BP
£ 87,828m

Shell A
£ 84,419m

Shell B


£ 58,364m

 ∑(£ 87,828m + £ 84,419m +  £ 58,364m) = £230,611 million = £230.611 billion
The “crude value” of BP & Shell  to the UK = £230.611 billion

Systemic Risk ….GE Capital and AIG

Systemic risk is the risk inherent to the entire market or entire market segment brought on by a major failure of a financial institution. Thus if a major bank or financial institution fails, it could being other all the others down, like a row on dominos and break the whole financial system and wipe out confidence. Or putting in bluntly, the risk that the failure of one financial institution such as a bank could cause other interconnected institutions to fail and harm the economy as a whole.

The US Treasury Department on Mon 8th July made an announcement.


It now has included AIG and GE Capital to the list of companies that need extra supervision by the US Federal Reserve. Remember back in September 2008, when AIG got into trouble, The Federal Reserve Bank of New York lent $182 Billion (1.21% of the US National debt = $182 Billion) to prevent it from failing, in Oct 2008, in the UK, The Bank of England had to lend £36.6 Billion to RBS and £25.4 Billion to HBOS. Examples of institutions that are too important to fail, thus the term Systemic Risk.

Barclays Bank PLC

The Barclays 356 page annual report, a good read if you have time, some important nuggets can be found if you dig deep.

page 8: Paid £3.2 Billion (£3,200,000 million) in tax.

page 66: UK’s Legal & General Group plc own 480,805,132 shares = 3.99% of Barclays

page 66: His Highness Sheikh Mansour Bin Zayed Al Nahyanb of Abu Dhabi owns 858,546,492 shares = 7.02% of Barclays

Page 98: 373 people earned between £1,000,001 to £2,500,000 (nice work when you find it)

Page 206: Balance Sheet:

Total assets £1,490,321 million = £1,490 Billion = £1.490 Trillion
Trading portfolio assets £145,030 million = £145 Billion (effectively BarCap Trading Activities)
Customer Deposits £385,707 million = £385 Billion
Loans and advances to customers £425,729 million = £425 Billion

The UK 2012 GDP was £1,541,465 Million = £1,541 Billion = £1.541 Trillion
Assets of Barclays = £1,490,321 Million = £1,490 Billion = £1.490 Trillion

Thus Barclays’s assets = 96% of the UK 2012 GDP. The bank is HUGE.

The FTSE-100 Index…

The flagship financial index for the UK’s largest corporates (the blue chips) is the FTSE-100 share index. This index represents the UK PLC’s largest 100 companies.
Taking a closer look at the largest 10 companies that are in the FTSE-100 and seeing their representative percentage weight in the index gives even more insight:

HSBC Holdings = 7.69%
Vodafone = 5.59%
BP = 5.25%
GlaxoSmithKline = 4.77%
British American Tobacco = 4.12%
Royal Dutch Shell (A) = 4.01%
Royal Dutch Shell (B) = 3.56%
Diaego = 2.90%
AstraZeneca = 2.43%
BHP Biliton = 2.27%

[% weightings from Legal & General FTSE-100 Index Fund Managers Report]

Add up the percentages and you get 42.59%.

Yes, UK’s top 10 companies out of the 100 largest account for 42.59% of the FTSE-100.

The ‘remaining‘ 90 companies in the FTSE-100 such as BT, Barclays, Legal & General, Centrica, LloydsBankingGroup, Aviva, Prudential, British Land, Tesco, BG Group, Standard Chartered, National Grid, Arm Holdings, Marks & Spencer, Sainsburys, Severn Trent, Unilever, Burberry, Rio Tinto, GlencoreXstrata, The Royal Bank of Scotland, Land Securities, WPP, Standard Life, United Utilities, Anglo American, Rolls Royce,BAE Systems, Scottish & Southern Energy, RSA Insurance Group, Fresnillo, WM Morrison…. only account for 57.41% of the index.

Thus by investing into a FTSE-100 Index Tracker, over 13% of your investment is held in HSBC and Vodafone alone. The FTSE-100 is distorted by the UK’s  largest top 10 companies.

The RBS Annual Report & Balance Sheet

One can find the RBS annual report at the link below:-[]

Some very salient information can be found in the 543 page annual report.

page 2: RBS has £42 billion Short-term wholesale funding 

page 24: We now hold £100 of deposits for every £103 we lend (thus more loans than deposits, and thus the need for the short term wholesale funding)

page 40: At 31 December 2012, HM Treasury’s holding in the company’s ordinary shares was 65.3% and its economic interest was 81.1%.

page 97: The Balance sheet is £1,312,295 million (£1.312 Trillion = £1,312 Billion)

Page 97: Loans and advances to customers £500,135 million (£500 Billion = £0.5 Trillion)

Page 97: Customers deposits £433,239 million (£433 Billion = £0.433 Trillion)

The UK 2012 GDP was £1,541,465 Million = £1,541 Billion = £1.541 Trillion

Thus The Royal Bank of Scotland’s assets = 85% of the UK 2012 GDP. The bank is massive.

Biological Nature, Big Banks & Complexity

Lord Robert May [,_Baron_May_of_Oxford], a fellow of The Royal Society, and a former President of the Royal Society, a highly respected Australian born academic, a man of great intellect in the scientific world especially in the area of biology and complex systems, has used his work and knowledge to look at the complexities in finance and financial products & instruments. This work is very much related to the global financial crisis as the work of Lord Robert May has shown that nature is based on simple mathematical models with very complicated dynamics, it is exactly these principles too, that have also resulted in the grotesque chaos of our financial markets.

A 2012 working paper from The Bank of England, co-authored by Lord May [] discusses the relationship of the size and complexity in financial systems.

What this work is effectively saying, is that while banks get bigger (balance sheets grow), they follow nature and become more complicated in structure, and this then results in massive risk. Due to the size of the bank and thus its overall complexity, a problem in the investment arm, this could spill over into say the retail operation, and bring the whole bank down. Thus one bad trade (like a rotten piece of fruit) could cause cross-contamination.

Thus we see the debate about banks being too big to fail.  Alan Greenspan, the former chairman of the US Federal Reserve has said that large organisations should be deliberately broken up: “If they’re too big to fail, they’re too big”. The former Governor of the Bank of England, Mervyn King, is quoted to have said that “If some banks are thought to be too big to fail, then, they are too big.”

UK Interest Rate: Expect No Immediate Rise.

Yesterday UK£ Sterling fell against the US Dollar$ when the Bank of England announced that UK interest rates would not be rising from the historical low of 0.5%. The markets had assumed a rise in the near future, but this was clearly an error, thus sterling has come under pressure, depreciating against the US Dollar. UK and US Equity Markets surged.

Reading the Bank of England press release [], it’s clear in the wording:

At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report.  The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.”

This is no different in the USA, Ben Bernanke the Chairman of the US Federal Reserve has made similar comments on low interest rates, and has stated that rates will remain low for the considerable future. His comments from a meeting in San Francisco explains why long term rates are slow low


I will begin my remarks by posing a question: Why are long-term interest rates so low in the United States and in other major industrial countries?  At first blush, the answer seems obvious: Central banks in those countries are pursuing accommodative monetary policies to boost growth and reduce slack in their economies. However, while central banks certainly play a key role in determining the behavior of long-term interest rates, theirs is only a proximate influence

What happened on the equity markets ?

The UK’s FTSE-100 soared by over 190 points, a 3% gain, closing at 6421 adding nearly £50 Billion to corporate valuations as investors moved into equities, to get a decent return (juicy dividends) as cash on deposit yields next to nothing, and also clearly looking on the horizon the prospect of continued cheap money. By keeping rates low, it deters savers, in the hope they will spend in the wider economy and this consumption fuels some level of growth, but also reduces the cost of capital to businesses, in the hope they will invest and grow and fuel employment growth.


UK Infrastructure Investment: HM Government


It was last week (late June) that HM Government announced major infrastructure investment in the region of £100 Billion


It effectively is a Keynesian view to spend our way out of recession and kick start growth.


The reality is like in the USA and continental Europe, infrastructure investment has been a low government priority, and we see aging bridges, old train lines that lack passenger capacity, so there is a real need to build new infrastructure, reduce overcrowding, replace ailing infrastructure and create prosperity too.

Already in the UK, there are FTSE listed companies specialising in infrastructure:

John Laing Infrastructure:[]
Gives a 5% yield from its juicy dividend.

GCP Infrastructure: [
Gives a 6% yield from its delicious dividend.

Also there are funds that invest in Infrastructure:
First State Global Listed Infrastructure [] that invests in companies like National Grid, Crown Castle International, Scottish and Southern Energy as just three names in the fund.

Also there are now specialist investment managers specialing in Infrastructure, like Infracapital.
They are a part of M&G Investments [] who are a owned by Prudential [] the UK insurance giant.

The facts are simple, about 65% of the UK’s infrastructure is already privately financed and with Government spending under massive pressure, HM Government has to ask the private sector to undertake infrastructure investment, and funding will come from companies and funds to undertake this investment.

June 2013 UK Government Borrowings….

The UK government, borrowed some “loose change” in June.

Their were four UK Gilt auctions in June, raising money for HM Treasury. The UK Debt Management Office is responsible for Gilt (UK Government Bonds) Issuance, that raises money for No 11 Downing Street.


[1]          04-Jun-2013 0 1/8% Index-linked Treasury Gilt 2024: Raised  £1,600,000 million
[2]          11-Jun-2013 2¼% Treasury Gilt 2023: Raised  £3,750.0000 million
[3]          13-Jun-2013 4¼% Treasury Stock 2032: Raised £2,250.0000 million
[4]          20-Jun-2013 1¼% Treasury Gilt 2018: Raised  £4,750.0000 million

Look at the maturities, 2018, 2023, 2024 and 2032. UK is borrowing with major debt repayments years away. We are mortgaging our futures.

In June, HM Government borrowed 

∑(£1,600,000 million + £3,750.0000 million + £2,250.0000 million + £4,750.0000 million)

=(£12,350,000,000)= £12,350 million = £12.350 Billion.

Why ?

Well clearly to meet all outgoings for HM government, (The public sector) there was not enough revenue from taxation, to bridge that gap, HM government borrowed via these 4 Gilt auctions, £12,350 Million (or £411 Million a day).

The Complexities of Bank Finance

The finances of banks are highly counter intuitive. Customer savings (bank deposits) are a liability to the bank, NOT an asset (as one may mistakenly think) to the bank as they have to be repaid at any time (customer withdrawal); the assets of a bank consist largely of loans made to individuals or companies, since they too will be repaid with interest over the period of the loan. However those debtors (borrowers of the banks, such as companies or individual) may not have the liquid cash to repay the bank loans (100% loan repayment on a mortgage is not always practical, so if the bank demand the loan or mortgage to be repaid immediately, that is a tall order), thus any run on the bank (customer withdrawals) will create a huge potential problem for the debtors of the bank (individuals or companies who have borrowed money). The run on the bank will result is the bank demanding immediate repayment of the loans or mortgage to be repaid, refusal to refinance loans when they become due, or simply charge a higher rate of interest and impose more stringent conditions when the loan is renewed.

This explains why problems for the banks ripple throughout the wider economy.

China’s Credit Crisis

Late in June, the stockmarket listing of Macau Legend in Hong Kong was suspended. This share floatation was worth approx £500million.

The reason for the abortion of this floatation was due to the market turmoil in China and the potential pending credit crisis in China. According to financial markets inter-banking lending in China is ceasing up. Last week the Shanghai index fell and has been very volatile and overnight borrowing costs jumped to 13.9% on Fri 21st June. (This is more than double the normal rate).

In 2012 the People’s Bank of China (PBoC), the central bank forced commercial banks to hold more cash in an attempt to create a buffer for banks to weather bad loans and also was an attempt to cool the inflated real estate market.

The result of all this, had rattled global markets, with the UK and US addicted to QE and when the US Federal Reserve hinted at winding down the bond buying programme (QE), the global markets too fright.

This is an age of unprecidented risk, Stagflation in Europe, High Youth Unemployment, Emerging Markets with structual issues, such as Chinese domestic real estate inflation and a potential banking problem, India with poor infrastructure, and the US gripped by an economy that is stuck in 2nd gear, and a huge budget deficit.