Britain’s Timeless Debt

How long should you wait before “writing off” an old unpaid debt? If the borrower is Great Britain, the answer is undoubtedly “a very, very, very long time.”

Why? Because last week, the federal Treasury of the United Kingdom announced that it would soon pay off almost $350 million of old government bonds.

How old? Chancellor of the Exchequer Winston Churchill first issued the bonds in 1927. But his 1927 offering actually contained refinanced bundles of significantly older debt. Much of it originated during the First World War, and some of it dated from the South Sea economic crisis of the 1720s and the European Crimean War of the 1850s.

The debt still carries an annual interest rate of 4%, and maintains a perpetual (i.e. no maturity date) term. But it is “callable” (i.e. it can be paid off) at any time by the British government; the recent decline in global interest rates has compelled the Treasury to liquidate it.

This isn’t the only historical instance, though, of the British government enjoying an astonishingly good deal on financing terms. For instance, from 1898 to 1997, it held a rent-free lease from the Chinese government on all of Hong Kong.

And during the Second World War, via America’s “Lend Lease” program, the United States sent weapons to Great Britain to fight the Nazi regime. The British government made its final payment on this debt in 2006, incurring an annual rate of 2% throughout the loan period.

Perpetual bonds exist in the corporate world as well. But most investors consider them to be extremely risky securities; they usually demand very high interest rates to compensate for the limitless maturity dates. And certain global banks have classified them as equity instruments (i.e. debt in name only) for purposes of meeting their Basel III capital reserve requirements.

So did investors effectively purchase an equity interest in the British Empire when they first “loaned” Churchill the callable perpetual funds in 1927? Perhaps so, but during the 1920s, the Empire must have represented an extremely attractive investment opportunity to those investors.

After all, Britain governed more than 20% of the world’s total land at that time. Its empire stretched from Africa (e.g. South Africa) to Asia (e.g. India) to the Pacific (e.g. Hong Kong and Singapore) to the Americas (e.g. Guyana). And it nurtured close economic relationships with Australia, Canada, and the other future members of the Commonwealth of Nations.

Today, though, the British Empire’s possessions have dwindled down to a handful of island territories. And even New Zealand is moving towards full independence by debating the removal of the Union Jack from its national flag.

So what investment lesson can we learn from the lenders who agreed to invest in the British government in 1927, and who are finally being repaid this year? Perhaps it is this: we should always think twice before entering a financial commitment with no exit strategy in mind.

And perhaps that lesson applies to all other commitments, too.