You report that bond investors are warning against a “ruse” to fund higher UK defence spending through increased government debt (Report, February 19). Are these the same so-called bond vigilantes who actively pushed negative yields and paid governments to borrow even more?
Five years ago, a third of government debt globally carried a negative yield. Today, positive nominal and real yields prevail. The consequential capital losses, whether paper or real, say that strategy was neither vigilant, rational nor wise.
YouGov recently found 68 per cent of UK respondents support Nato; 63 per cent reject taxes rising to boost defence spending; 65 per cent eschew cutting other spending to fund defence. We all want security; two-thirds refuse to pay more for it. So who will pay?
A hypothecated fixed-term “national defence loan” raised from financial institutions is a logical answer. It would be for the government to determine the loan principal; Germany is spending an extra €100bn (£87bn) on defence catch-up. Our situation is as parlous. Specific covenants tied to measurable results (including early redemption penalties for missed targets) for defence capex would a) limit the duration of the financial commitment, b) explicitly link it to “value for money” and c) enable it to be clearly articulated as to why the money is needed in the national interest.
The term would be fixed at five years. If Nato secretary-general Mark Rutte is correct, the UK must be ready to fight a full-scale war in Europe by 2030; we need urgency.
Naysayers argue that patriotism does not drive returns. Forget the emotion; consider financial pragmatism. Fund managers have a responsibility to protect as well as enhance clients’ assets, commensurate with investor risk appetite or the fund mandate. In the event of war the UK would very likely be under physical and cyber attack: bricks and mortar and infrastructure assets would be degraded or destroyed as would the value of financial assets. Why not protect those assets as a matter of principle by investing in a deterrent that also includes a market return?
And the cost of sustaining a war? In 1944, the UK spent over half its annual GDP on the war effort against 2.4 per cent of GDP on defence today. As then, government, investors and the public really would be unable to duck hard choices.
The threat of war does not diminish because nobody wants to pay more to deter it. If anything, it raises the risk of it happening.
Alastair Irvine
Grantham, Lincolnshire, UK
