Tag Archives: debt

Other people’s money: why the Bank of England needs to raise rates

Legal and General Investment Management’s chief economist has urged the Bank of England to start raising rates, amid fears of an impending consumer debt crisis.

“So many UK customers are on variable rate mortgages – more than in the US,” said Tim Drayson. “I think it’s important to get the process of rate rises underway and normalise it, as the longer you leave it, people will take on more debt…then you’ve got potential for a harder landing.”

“Unsecured credit is starting to get frothy again,” he warned. “There is scope to use macroprudential tools…[but] interest rates is one way of doing this and getting in to all the cracks [of the financial system].”

The Bank of England base rate has remained at 0.5 per cent for more than six years. Doves argue that it should stay this way due to low inflation figures, while hawks say that wage growth and excessive lending need to be addressed.

Drayson said that LGIM is “more hawkish than the market”, although he commented that the UK “is a bit of a wildcard” as its growth depends greatly on whether commodity prices recover or not.

Brent crude is currently lingering at around $43 a barrel, with the $115 of summer 2014 but a distant dream. LGIM attributes the decline to an increase in supply, rather than a slowdown in industrial production in China and the eurozone.

Desperately seeking financing: Nigeria in trouble

How do you solve a problem like Nigeria? Long touted as the jewel in Africa’s crown in terms of economic potential, the country’s bad debts and a domestic liquidity crunch are showing no signs of abating as long as the low oil price persists.

Brent crude futures edged down to around $43.63 yesterday evening, which is not a million miles away from August’s six-and-a-half year low of $42.23. I’m pretty bearish on oil and wouldn’t be surprised to see the price slide wayyy down over the coming months – the underlying pressures just aren’t going away.

The Nigerian economy, which is heavily dependent on oil, can’t break even at these prices and its currency has crashed. The central bank is rationing its foreign currency reserves, causing major problems for companies who borrowed in dollars and need to pay off their debts.

Multinational oil companies such as Shell and Chevron had already sold off their assets in Nigeria to local firms, who borrowed money to buy them and are now the ones saddled with this bad debt.

With such limited liquidity in Nigeria, it’s the international market who is providing the refinancing – mainly banks and private equity. And a well-placed source tells me that he expects more London listings for Nigerian companies, who can’t raise money on the teeny Nigerian stock exchange.

Will institutional investors come to rescue Nigeria from its debt debacle? It’s not the safest bet, but I expect that there is money to be made for those willing to take a long (long, long…) view.

Meanwhile Nigeria is facing a major fuel crisis. Despite its plentiful oil reserves, the country imports its petrol as it does not have the capabilities to refine it. Importers are now withholding petrol after an alleged payment dispute with the government, causing lengthy queues of angry motorists at petrol stations.

Nigeria needs to get a grip on its resources and build some refineries. Of course, to do this it needs reliable power generation, another problem the country is yet to address. And is unlikely to do so as long as its liquidity woes continue.