The UK £ 12m government loan which will cost Wales more than £ 100m

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A total of £ 12m in loans, financed by UK government loans in support of pre-decentralization business development agencies in Wales, will end up costing more than £ 100m.

And while UK government bond rates are at record lows, the Welsh government is unable to refinance the debt it has assumed on more favorable terms.

The loans were made by the Treasury Department in the 1970s and 1980s on behalf of the then Secretary of State for Wales, who then granted loans to support the activities of the now defunct Mid Wales Development Corporation and the Development Board for Rural Wales.

This reflects the interest rate on UK government bonds when they had an average interest rate of 14.8%. The total of 54 loans were taken out between 1974 and 1981 with an average duration of 60 years.

To date, they have made £ 72 million in interest payments with only £ 1 million of the principal paid off, which means £ 11 million still outstanding.

The debt from the National Loan Fund (NLF), which is overseen by the Treasury Department’s Debt Management Office (DMO), has to pay back £ 20 million in interest over an average remaining term of 15 years.

There are currently no UK Treasuries prior to 1992, which shows that the Treasuries that financed loans to the Welsh Undersecretaries have been refinanced by the Treasury on more favorable terms without the lower funding costs being passed on to the Welsh Government.

The Treasury Department’s position is that the NLF cannot make a loss without taking into account the fact that it has already earned a sizeable margin on the original loans. The Treasury Department said gilts issued at the time could not be tied to a specific final beneficiary but were part of broader government budget considerations.

Leading economist Gerry Holtham, however, described the Treasury’s position as “outrageous” as the UK government was able to refinance its debts at lower interest rates while the Welsh government was trapped in the historically high interest rates of the 1970s and 1980s.

It is unacceptable that one part of the public sector can benefit at the expense of another.



Gerry Holtham

Mr. Holtham said, “The National Loan Fund has made a big profit on this loan for the past 20 years and since 1996 at least. The idea that Wales should pay almost 15% for another 15 years if the Treasury Department can borrow 1% or 2% is outrageous.

“The Treasury Department has the power to play fair if it wants to. It has its pound of meat, now it insists on blood.”

The Welsh government was asked why it did not try to refinance the debt with the ODM, or after paying more than £ 70m in interest, asked to write it off?

A statement said: “The outstanding ‘legacy loans’ in relation to the Development Board for Rural Wales and the Mid Wales Development Corporation are with the National Loans Fund, which is incapable of loss.

“Therefore, when considering prepayment penalties, the value payable represents the present value of the future principal and interest payments on the loan that would have been paid to NLF if the original amortization schedule had been met in full the repayment of loans to the NLF hardly any financial savings are possible. “

In a joint statement on the debt, the Wales Office and Treasury Department said: “It is correct that there are no more government bonds from the 1970s that mature according to the Welsh government debt profile.

“However, the gilts we refer to in connection with these specific repayment terms are fictitious and merely illustrate the general funding restrictions and opportunity costs DMO faces in funding any loan the NLF provides.

“Any funding provided by the NLF triggers a number of loan commitments during its term, based primarily on the issuance of government bonds.

“While it would appear that a series of back-to-back loan decisions should allow for refinancing, there is a tenet behind NLF loan terms that goes beyond the legal requirement to ensure that the NLF does not incur a loss, that every loan extended is an opportunity cost for the Financing has the issue date that results from the originally agreed loan interest rate.

“Due to the lack of opportunities at the time of issue, these costs remain unchanged throughout the entire term of the loan, regardless of whether the applicable interest rates rise or actually fall.

Furthermore, DMO today (and the Bank of England before DMO was founded in 1998) does not issue individual government bonds (and has not generally done so in the past) to fund certain loans, and it would be impossible to do all of them consecutive bonds to identify bond issuance decisions since the 1970s that have been influenced by Welsh government loans.

“In short, when gilts are issued, the funds raised are not pledged to specific loans or other government expenditures. Gilts are issued to fund central government cash expenditures for the fiscal year – including refinancing due debts and closing the “gap” between new spending and current government revenues – through the NLF. “

Under the Wales Act 2014 and 2017, the Labor Welsh government has the ability to raise up to £ 150 million per year in capital through the UK government, which issues Gilts through the NLF. It also has the option to borrow £ 200 million a year for resource spending that it has never used before.

With UK sovereign debt rates at record lows, the Welsh government used just a single £ 65m transaction to raise capital in early 2019.

In contrast, the Scottish Government, with a larger raising capacity of £ 450m a year since the Scotland Act, has 1.6bn a year.

The Welsh Government does not intend to raise any capital in the remainder of the year until the end of March.

The legacy loans came under their direct responsibility in 2006 when they merged the Welsh Development Agency, which they funded alone, into their public service office in 2006 and its funding through the Barnett Formula.

The old borrowing does not count towards the total borrowing limit under the Wales Act 2017, which allows the Welsh Government to borrow up to £ 1 billion.

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