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Analysis

Sterling status ‘a good thing’

by David Marsh

 

Robert Stheeman, who since 2003 has led the UK’s Debt Management Office, an executive agency of the UK Treasury set up in 1998, tells OMFIF Chairman David Marsh about changes in sovereign debt management, the impact of Brexit, and the benefits of sterling’s reserve currency status.

David Marsh: As head of the DMO, you have seen great change in the external environment. There was the 2008 financial crisis and a big increase in UK international debt issuance because of the country’s parlous economic position at the time. Do debt managers now have to be more concerned with relationship management with big international investors, including sovereign funds and central banks?

Robert Stheeman: Yes. When the UK DMO opened our borrowing quantity was much less than it is now. I used to go abroad to seek potential investors only once every two years. Now we have to be more proactive. The market, too, has fundamentally changed. It’s not just bigger, it’s also much deeper. That liquidity has enabled the UK DMO – and would enable any other debt manager – to access markets and raise funds on a scale which 15 years ago would not have been imaginable.

Marsh: Sterling is still one of the world’s major reserve currencies. Is that a good thing?

Stheeman: I think it is probably a good thing from a debt management perspective as it adds to the diversification of the investor base. I don’t think it’s a deliberate UK target to say sterling needs to have reserve currency status. But having it is undoubtedly beneficial. Sterling is the fourth or fifth largest reserve currency. That is a good position to be in. Being the largest reserve currency, on the other hand, would bring all sorts of complexities from a debt management perspective.

Marsh: Countries in the euro area are linked together by monetary union, but they don’t have a debt union and they don’t have a single government. Does that give Britain advantages over individual euro area issuers?

Stheeman: I think it does, on a couple of levels. The first is the sense that the UK is sovereign in its currency. This sovereignty works to our advantage in a way that it probably would not for one or two smaller euro area countries. The idea that matters such as debt management policy and debt management issuance must consider what all sorts of other jurisdictions are doing would hugely complicate proceedings.

Marsh: There are a couple of questions I need to ask about Britain’s exit from the European Union. The last time sterling suffered a serious fall was after the Brexit referendum in June 2016. What did your peers say to you the day after we decided to leave?

Stheeman: I don’t think any of them spoke to me the day after the referendum, which was probably a good thing! Britain’s floating exchange rate was an important safety valve and helped mitigate potential pressures from the international investor community and on the UK bond market. A floating exchange rate allows the market to express itself, in a way that would be much harder if investor attention focused on bond markets with a limited amount in other areas. I feel that it has been a huge boon having a floating exchange rate.

Marsh: What do you think the government needs to do to make sure during the Brexit process that the UK keeps faith with the considerable number of foreign investors who have put money into gilts?

Stheeman: This is all about credibility. The nature of sovereign debt is that it needs to be credible to be a serious proposition for an investor. Debt management and the price of sovereign debt are a manifestation of credibility and faith in government credit. Governments must make sure that they uphold that standing.

To listen to this conversation in full, visit omfif.org/podcasts

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