Asset sales and interest rates (wonkish)

One of the most politically effective arguments made for selling publicly owned assets, such as government owned corporations is that, by reducing debt, it will reduce the interest rate on government bonds. This is plausible enough, and not by itself a conclusive argument. The interest saving (including the benefit of lower rates on remaining debt) needs to be set against the loss of earnings. But it would be nice to know how large this saving might be.

The Queensland state election, just passed, provides something of a natural experiment. The LNP government proposed to sell $37 billion in public assets and repay $25 billion in debt ($18 billion associated with the enterprises to be sold, and $7 billion in general government debt). Going in with 73 of 89 seats, the LNP was almost universally expected to be returned. Instead, they lost their majority and will probably lose office. Although the result is not yet final, everyone is now agreed that asset sales are off the table.

So, we should be able to look at the secondary market for QTC bonds to see how much this surprise changed the interest rate demanded by bondholders (this is what’s called an “event study” in the jargon of academic finance). You can get the data from!ut/p/a0/04_Sj9CPykssy0xPLMnMz0vMAfGjzOLdnX2DLZwMHQ383QwtDDy9DUIsPTwDDA2NTPULsh0VAVfZvz4!/

and I’ve included it over the fold (a bit of a mess as I can’t do HTML tables)

The data shows that interest rates have generally been tending downwards, as you would expect given the Reserve Bank’s much-anticipated cut. On the trading day after the election, rates on longer term bonds rose by between 0.05 and 0.1 percentage points (or, in the market jargon 5 and 10 basis) points. But all of that increase, and more, was wiped out the next day when the RBA confirmed its cut. Overall rates on QTC debt have fallen by around 0.25 percentage points since Newman called, and then lost, his snap election.

To sum up, the surprise abandonment of one of the largest proposed asset sales in Australian history caused only a momentary blip in interest rates on Queensland government debt, immediately wiped out by a modest adjustment in monetary policy at the national level.

03/02 02/02/15 29/01/2015 22/01/2015 17/12/2014
QTC 14/10/2015 2.0350 2.1450 2.1800 2.3000 2.3400
QTC 21/10/2015 2.1500 2.2200 2.2700 2.3850 2.4250
QTC 21/04/2016 2.1150 2.2100 2.2000 2.3250 2.4200
QTC 14/09/2017 1.9750 2.1400 2.1000 2.2200 2.2850
QTC 21/09/2017 2.1200 2.2750 2.2200 2.3500 2.4200
QTC 21/02/2020 2.3100 2.4650 2.3600 2.5000 2.6350

50 thoughts on “Asset sales and interest rates (wonkish)

  1. Perhaps that the expected income from asset sales that market participants priced into the debt rates how-to-put-this didn’t shift as much before vs after the election as campbell newman wanted?

  2. It’s like buying groceries on credit card for many years then having to sell the cutlery to pay it off. It confirms past mismanagement and reduces options for the future. I just noticed the ads on the BBC website. Long after the usual cash cows have been sold the day must come when critical government services are compromised in order to generate revenue. Like Hospital X brought to you by Drug Company Y.

    As touched on in an earlier thread there is a clear conflict of responsibilities in selling or leasing high carbon assets. If a responsible government should steadily phase them out this is clearly not going to happen when a private operator or lessee needs to achieve high returns. That is to reward both shareholders and or the asset owners.

  3. Sorry, jaws dropped at the second para.

    Won’t go further or will ‘be crucified by folk better informed, but at least some may get what I’m finding difficult with that para.. nuff said?

  4. @paul walter

    Nuff said?

    Not for me at any rate. You’ll have to explain your problem a bit more. The second para is a straightforward account of the LNP plan and their electoral defeat. I have no idea what would cause you any consternation.

  5. @John Quiggin
    Ok , in a nutshell, why is the government paying debt on the stuff privatised. Wasn’t the debt built into the original valuation of worth? Let the buyers pay their own debts..

    You may laugh at my ignorance but I’d like to hear from someone who knows of the estoterica and confirm me in my folly so I can move on also, free of misconceptions.

  6. @Hermit

    The selling of assets in and of itself does not confirm or disconfirm past mismanagement. The selling of assets in and of itself does not increase or decrease future options. What I mean by these statements is that one has to make case by case judgements about each of the assets a government is proposing to sell and the context in which they want to sell them. Having said that, my position is that governments should retain natural monopoly assets and public service assets where private enterprise is unlikely to fund things adequately. Power, water, communication infarastructure and railways are good examples of the former along with schools and hospitals as examples of the latter.

    If the public declare democratically that they don’t want certain assets sold (as the Qld public has done in the last two elections) then Parliament should respect the wishes of the voting public. Furthermore, when a democratic decision is made economics must become a second order consideration no matter what one’s economic views or interests. Democracy is THE first order consideration. Economics is never more than a second order consideration. When people make a democratic decision, economics is only one set of parameters among many sets of parameters they consider. To order decisions only by economic parameters is to de-legitimise all other human decision-making except that rooted in economic calculation. That is absurd and can only create an absurd and inhumane society.

  7. Paul, if you sell an asset for the value of the asset minus the debt and still hold the debt you’re not very bright.

  8. When you say you cant do HTML tables, PrQ do you mean the software won’t recognise them or you don’t know how?

    The syntax is fairly simple.

  9. Sorry I misunderstood the question. If you sell your house and don’t want to buy a new one would you pay off the remaining part of loan before you sold the house or after.

  10. @paul walter

    Not an exact analogy but, if you sell me your house for $370,000 I get a house and hand over a cheque. But I don’t hand over one cheque to you, I hand over a cheque for $270,000 made out your bank to pay out your mortgage (in return for which I get clear unencumbered title to the house) and I hand over a cheque for $100,000 made out to you.

    I don’t buy the house from you for $370,000 and keep responsibility for your $270,000 mortgage as well.

  11. @Fran Barlow

    I hear that Mandarin and Igbo (to name two languages) have fairly simple syntax. Yet if one has never learnt them then one cannot speak them. 😉

  12. @David C
    Well, that’s what I’ m wondering..

    In my own suburb a large park was swapped for industrial land for a housing development, yet the industrial land, a smaller parcel as well as contaminated, was valued equally with the park as a fair swap.. The people of my suburb wonder why we got dry bread and dripping when we paid for a hamburger deluxe. This we were told, was what had to be forgone to have developers to develop where they wanted to develop rather something that preserved an established piece of commons for the community here.

  13. @Megan
    Yes Megan. Just trying to confirm from the more knowlegeable how these things are done, given the para. Also, if commercial in confidence and foi blunt adequate scrutiny of the process.

  14. The federal government first sold Commonwealth Bank shares for $5.40. Those shares paid $5.70 gross dividend (ignoring retained earnings) over the past year.

    How much less debt would the federal government now have if they had never sold those shares (as well as still owning the shares which are now worth $90)?

  15. @John Quiggin
    It’s an aesthetically pleasing bracket.

    So I asked something people think is dumb, but I was wanting to eliminate the unthinkable from consideration, so what was I to do?

  16. @paul walter

    I didn’t say it was a good idea. To my mind it’s a stupid idea based on a bogus premise and one which the electorate has seen fit to throw out two governments for attempting.

    The better analogy might be this:

    Your strict disciplinarian dad, who is a scary authoritarian psycho, sees that you have a $10,000 credit card balance. So while you are away for the weekend and he is minding your house he has a garage sale and sells the entire contents of your house for $10,000.

    When you return he proudly announces that your credit card debt has been paid off.

    Then he can’t understand why you are pissed off at him.

  17. Worse still, Megan, he has sold your stuff to a mate, when next month it might have been worth a shirtload more.

  18. Megan and Paul – gave me a good chuckle, but perhaps I should weep for what the buggers of both stripes are doing to us.

  19. And of course, when his mate hears you have no furniture he offers to rent you a TV, fridge, bed, chairs, tables, washing machine, oven, stereo etc… – one previous owner – at reasonable market rates, say $10,000 a year for the lot.

  20. Agree, bjb.. it’s a site up for a long time and it is informative and civilised. I ought not to take the vocational aspect of John Quiggin for granted.. these are rare sorts of people. Besides, he knows my flaws too well.

    Megan is typical of the site, intelligent and rarely unreasonable as are the rest, even Terje.

  21. Paul
    I will try to be unreasonable. I totaly understand your jaw droping and mine did too after you pointed it to second para. Your question is excellent. And others gave you explanations which are wrong. Wrong is because personal accounting is not same as corporate or state accounting. State budget is not working in the same principle as personal budget. How?

    Mortgage is in owner’s name, not in house name.
    Corporate debts are in corporate name, not in owner’s name. So, your question is excellent.
    In which name is the debt that Qld is paying off with sale of assets?

    In corporate sales, debts of sold corporate is continuing on books of the corporation, not staying with owner as it does with house sale.
    The question is how state asset debt is underwriten? Did state take credit, or did asset take credit? Why would be state paying off asset’s debt if the debt is calculated in capital income ratio?

    State does not have to account asset’s debt as corporations do since state can get better credit terms then corporations, it would be natural to be on state’s books, not on assset’s books. But is it?
    If the debt was on asset’s books, then it wasn’t counted as state debt and also reduced the price of asset, because it affects capital/income ratio which is how property price is calculated. But then, paying off “$18 billion associated with the enterprises to be sold, ” would be a pure giveaway to new owners, assets would be almost free.

    I totaly understand your jaw droping.

  22. John, even for a back of the envelope exercise you might be better doing a bit of difference-in-differences. What happened to comparable States’ bond rates? After all the blip could have been a random event common across States.

    Plus a critic might say:
    1) The LNP loss was not a black swan – the bookies in the last fortnight had the LNP as the favourite but far from an unbackable one. That risk would have been priced in.
    2) A purchaser of those bonds would probably judge that any incoming government will still (rightly or wrongly) try to keep that AAA rating and hence if debarred from asset sales will instead bring in new revenue measures. So any blip mostly represents the additional expected risk to creditors of alternative measures of servicing the debt, not the additional risk of the debt not being serviced.

  23. @derrida derider

    As I mentioned the general movement (eg Aust 10-year Treasuries) was around 25 basis points down, Qld about 15. That’s consistent with the immediate impact

    1. Last odds I saw LNP were paying $1.38, Labor $3.50. That implies LNP chance of winning around 75 per cent. You can adjust for this without changing the numbers.

    2. AAA rating already gone. But I agree, the probability of Qld defaulting was and remains minuscule, so the interest rate effect is small. That was the point of the OP.

  24. There’s a further question of what happens to the cost of the services after the asset is old. IIRC one boring old reason for the government to provide services was to facilitate a monopoly service with single supplier efficiencies without monopoly pricing, that is, charged at the cost of provision of the service not at what can be extracted from the users. This is particularly true with “essential” services like water and electricity. The government can get/might a premium on the assets if it sells a monopoly but this is certain to be recouped by the new monopoly owner.

    The real costing shouldn’t be a costing for the government, it should be a costing for the population, this year and in future years. If a government charge/tax is replaced by a larger private “tax” it’s hardly a good idea. This seems to be almost completely overlooked by everyone.

  25. Actually, Jim, the traditional public finance view of natural monopolies was that you maximise efficiency by pricing the service at MARGINAL cost – typically much lower than fixed costs, with those fixed costs mostly being in the form of taxpayer-funded debt repayment on the borrowing used for building long-lived infrastructure.

    But then no-one ever seems to have taken this bog orthodox economic analysis seriously. As John often points out a lot of neoliberal economics just gets ignored when inconvenient to powerful parties.

  26. @Jordan
    Jordan, thank you for your kind words.

    We’ll see if others reply to your points and it seems obvious from the various comments that there must be a thousand other ways of skinning a privatised cat also.

    The Age, page 1 today, for example, talked of large scale tax evasion to offshore havens, altho this report didn’t seem to be at the online version when I just checked (unless I was reading yesterday’s edition?)

  27. HTML tables explained here by Dave Raggett.

    This works but is too much trouble. I find it much easier to create the table in Excel or LibreOffice, copy, (LO) Save As Bitmap in a new text document, then (LO) Save Graphic as a jpg file, then upload that.

  28. PS – by coincidence, if others want o find out a bit more about this “traditional public finance view” today I came across a readable and (almost) non-mathematical treatment here

  29. I’m as happy as anyone that the duplicitous and crude Strong Choices package failed. But I still can’t see what public benefit there is in government owning power stations and export ports, operating in competitive markets. There are better places the capital and government attention can be placed, and why carry the needless financial and policy risk?

  30. @Historyintime

    In so far as the power stations are FHC plants it’s easier to shut them down or coordinate their phase out and clean them up. Once you sell them and superannuation-holding institutions and other local investors get equity it gets more messy for rightwing governments. It’s not as if you can sell them without a licence to operate.

  31. The lease of assets was about cash flow as well as paying down debt. Also some of the money was to manage the costs associated with the Beattie/Bligh Solar Scheme.

    It is nice owning lots of assets, but the Labor government was unwilling incapable of paying for the cost (or full cost) of their construction. Hence the accumulation of debt and cash flow issues, as it was a problem during the Bligh era, hence the sale of $15B worth of assets.

    Future construction of infrastructure costs money. At the moment despite the cutbacks Queensland is still cash negative, so if infrastructure is going to be built there will be more state debt

    The question is, “What will be the level of debt that Queensland is allowed to accumulate before Labor is removed from Government again?”

  32. Then there is the problem of stranded assets: as this paper makes clear, we have some very hard choices to make with respect to digging up coal to export, gas use, etc. Will this paper make light of day in the MSM, except to be attacked, pilloried, and mocked? (Sorry, rhetorical question.) Anyway, what about using CCS technology? The article explains:

    Because of the expense of CCS, its relatively late date of introduction (2025), and the assumed maximum rate at which it can be built, CCS has a relatively modest effect on the overall levels of fossil fuel that can be produced before 2050 in a two-degree scenario.

    How modest? Well, maybe 6% more coal could be burned, and given the energy expended on the CCS process itself, not much of that coal is available for prime energy use. And it increases the risk by delaying the inevitable hard choices.

    I am very cross that our government refuses to accept its responsibility to protect Australian citizens from the looming impacts of AGW. PM Tony Abbott’s public stance on AGW and on coal exports means he is no friend of the Australian people, sadly. Campbell Newman proved himself no better. But what more can we, the people, do about our political system being immune to scientific knowledge?

  33. Listening to Senator Ian MacDonald right now you have to come to the conclusion that Tony Abbott is a functionally disadvantaged person being encouraged through some kind of political training camp.


    …and then they have the hide to talk about the best interests of the country. MacDonald pairs Labour with Debt Deficit and Dysfunction,……wait on……It is the Liberals who are in control and we have all of those things right now, …..only more so. But on top of that we have Denial, Dishonesty, Deviance, and Debility.

    How blinkered can these Neo-Liberal Nutjobs be???

    DonO, I applaud your “crossness”.

  34. Megan ….. Queensland was running a significant deficit when they were elected. Over the past three years that deficit has been reduced to almost zero. So naturally the debt increased.

    The LNP have been a lot of unpopular decisions to decrease the Beattie/Bligh Deficit, but if they didn’t the debt and deficit would have been higher.

    So did you want popular decisions, more debt and higher deficits??

    Donald ….. I do not believe that you understand AGW at all. If Australia stopped all emissions tomorrow, in less than a year the increase in emissions from China would have exceeded all emissions saved by Australia. A reality that many Australians refuse to appreciate.

  35. @Joseph Langford

    “I do not believe that you understand AGW at all. If Australia stopped all emissions tomorrow, in less than a year the increase in emissions from China would have exceeded all emissions saved by Australia. A reality that many Australians refuse to appreciate.”

    Surely it is you who does not understand AGW?

    The reality that you think many Australians fail to appreciate is not relevant to AGW is it?

    This reality that looms so large for you, is for some of us, a reality that is far less important than other realities such as wanting to live in a better world, one that aims to give everyone a fair go.

  36. @Joseph Langford

    Over the past three years that deficit has been reduced to almost zero. So naturally the debt increased.

    Wait, what? ‘Naturally’? Surely the natural effect of a zero deficit is that debt does not increase?

  37. I suppose the un-news that un-labor colluded with the un-liberals to suppress details of an un-FTA deserves a few comments from you economically literate followers, as to any economic reasons why the modern miracle needs to be supressed as to publicity and info?

    Any takers?

  38. J-D ….. if the Labor Party leaves a large deficit you cannot just wipe the deficit, it has to be incrementally lowered. For example the deficit reduces from $15B to $10B to $5B to zero ….. debt increases during this period.

    No Julie, you do not understand!! It is a global system that functions on global parameters. Something that many ignorant Australians do not appreciate.

  39. @Joseph Langford

    You are the one who said that there is *a* global system.

    I think there are many interacting ‘systems’ – global and local – that need to be considered.

  40. No Julie ….. local systems are simply that.

    It does not matter is Australia lowers CO2e Emissions if by that action Global CO2e emissions increase.

    Australia shuts down iron ore refineries and people think that is a win for the environment. In most cases, all that happens is the iron ore mined in Australia and Coal in Australia is shipped to another country to be refined in less efficient iron smelters. The net environmental impact is negative yet still the environmentalists applaud.

    It does not matter if Australia lowers CO2e Emissions if by that action interact Global CO2e emissions increase. You can pretend all that you want, as long as CO2e emissions continue to increase globally the impacts of AGW will continue.

    China will continue to increase their CO2e Emissions as will other developing Nations.

    It is a Global Singularity that you have to evaluate.

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