The ‘success’ of this new plan was just in time to calm markets before the Christmas break, although the UK’s refusal to ratify the plan raised some interesting comments from the French finance ministry, calling for the UK’s triple-A credit rating to be cut.
Something more material that cheered up the markets for Christmas was the European Central Bank’s (ECB) new long term refinancing operation, offering banks £407bn of much-needed funding in December. The ECB’s decision to increase its exposure to banks in this way has effectively seen it ‘give in’ to market calls to help stem the debt crisis, which until recently the ECB had adamantly refused to do.
It would be unfair to call it ‘déjà vu’, but on Friday 13 January (unlucky for some) Standard and Poor’s announced the downgrade of nine European countries including France and Austria (both from triple-A to AA+), plus Italy, Spain, Malta, Slovakia, Slovenia, Portugal and Cyprus.
To be fair, the expectation of a downgrade of France had been on the cards since November and President Nicolas Sarkozy had already been making contingency measures by stating that a downgrade would not be a material concern for France. These comments probably had nothing to do with the impending French general election in May. C’est la vie!
As a result of all these shenanigans in euroland, UK term rates fell approximately 10 basis points to a new all-time low across the medium to long term swap curve. So how far are rates going to fall in the UK? It is hard to see rates falling very much further, however we would not expect to see them increase either.
The government is nearing the end of its current round of quantitative easing and some pundits suggest we may see some more. If so, rates should remain low although some fear this could lead to higher inflation despite the fact that the Bank of England forecasts inflation falling in 2012, which of course it recently did. January figures saw RPI fall from 5.2% to 4.8%. Whatever the position, we are confident that UK term rates are likely to remain low for some time to come.
On a slightly more positive note, 2011 finished the year with moderate activity in the UK PFI space, with a handful of projects reaching financial close in December. These included the long-awaited West Wiltshire housing scheme, Kirklees Excellent Homes for Life, Holt Park Well Being Centre in Leeds, and the Nottingham Tram. All of these projects benefited from the favourable low fixed rate cost of funds noted above.