Sunday, February 05, 2012

nonlinear response to interest rates

Just to recover something from my twitter feed, last Friday, BT announced its Q4 results and (among other things) its management said that they were scaling down their capital investment plans, and that one of the reasons was low interest rates. What? Well, as a UK company BT has to capitalise the net surplus or deficit in its pension fund every year and take a charge to profits for it. As pension funds have to hold a lot of bonds, low interest rates mean a bigger notional pension deficit. Whether or not BT has to put more cash into it, or whether it might just be more expensive to raise money, doesn't really matter. The impact is the same, completely counter-intuitively. Lower interest rates shouldn't discourage economic actors from undertaking capital projects.

A couple of things as a result. One, this tends to support the idea that there is no such thing as an economy-wide (Wicksellian) interest rate. If BT's pension fund were big enough, lower interest rates on its bonds might actually drive up rates on BT's own borrowings. Two, what about other companies? US firms often have big health insurance liabilities, and insurers typically have to own lots of bonds (and it wasn't the insurers that blew up, now was it, so best not fiddle). Do they experience this? Three, this may not be a thing as it may just be management spinning a pretty dreadful quarter, and Verizon in the US, a very similar business, decided to go ahead and lay a lot more fibre.

1 comment:

Anonymous said...

the future is fttc if not ftth.


the longer the build-out is postponed for, the more years of life are squeezed out of the existing copper rubbish, and the more the cost of the fttc/ftth kit drops.

therefore, always in bt's interest to postpone investment.

couple of things might change that - a government bribe (which they seem to be very good at getting), or competition.

very much the same situation applies in uk mobile, with players collaborating to slow down lte license round.

kostenloser Counter