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"Super gilts risk and its prevention

Author: WeiFengChun From: www.yourpaper.net Posted: 2007-11-21 09:38:38 Read:
[The Summary investors hold asymmetry of the risks and benefits of government bonds (1), while the risks to the government, their own exclusive high-yield debtor under Government by refinance old debt and may lead to the risk of loss of control by the size of the debt. This paper analyzes the characteristics of ultra-gilts, causes, risks and possible ways of risk prevention.

[ Keywords ] super gilts scale of risk-return government bonds

The national debt was called gilts because its security is good, that the risk is small, and the income is not high due. Currently, our national debt security, high yields and is therefore called "super gilts. This paper intends to "super gilts system analysis and reveal its inherent risks, and propose feasible measures to prevent risks.

A "super gilts characteristics
According to the theory of asset selection, risk - income no difference of points on the curve risks and benefits a symmetric, that is, high-risk, high-yield; low-risk, low-income.

Figure 1, point A (a, Ra) and point B (b, Rb) represent the risk of the two financial assets, government bonds and bank deposits - income portfolio. Because the risk of government bonds is less than the risk of bank deposits (a compliance with this principle, the market economy country designed by Treasury rates are generally lower than bank deposit rates during the same period, such as the United States, Canada and China. As can be seen from Table I, the United States from the 1980 average annual deposit rates are lower than the annual average Treasury bill rate, the most typical; rather Canada addition 85,87,91 BONDS average annual interest rate slightly higher than deposit rates over the same period, also in line with the assets Select the basic principle.

Point A moves to point A ', the national debt will become a low-risk high-yield financial assets, the "super gilts. The Chinese government bonds will have this feature. Performance in practice for government bonds interest rates higher than bank deposit interest rates. Shown in Table II, beginning in 1985, the interest rate of Treasury bills issued in China are higher than bank fixed deposits interest rates, this is clearly not in line with the basic principles of asset selection.

Two "super gilts" causes
Bank deposits, higher interest rates relative to the national debt "super Phnom Penh," the fundamental causes of the formation mechanism is as follows:
(A) worsening financial situation lead to an urgent requirement for funds
Ten years of reform and opening up, along with the "tax cuts none other financial increasingly make ends meet. The beginning of the establishment of the market economy system, the strengthening of the government's macro-control finances to provide stronger financial support. Financial performance is an urgent requirement for funds to finance budget deficits and economic construction funding. Obstacles tax increases and overdrafts to banks issuing treasury bonds will be the only legitimate way. Experienced administrative apportionments, low-interest issue, investors interests have been injured and inconsistent with, the government began to use economic means to operate. Act to protect the outside of bonds in order to ensure the supply of funds in a timely manner, in full, in addition to high interest to please the creditors become inevitable. In fact more than a decade, the Financial bank what big ask small controversy, is a great sense that the competition for capital controls. In the gaming process of the private wealth of contention, the Nash equilibrium has not been achieved, but that the growth in demand for funds to promote the interest rates rise.
(B) the lack of liquidity of the government bonds
The risk of financial assets, income and liquidity of the general relationship: risk is proportional to the income, liquidity and income is inversely proportional, ie the higher the risk, the higher the income; mobility is lower, the more revenue high. The nature of the state-owned bank substantially the same as the risk of government bonds and bank deposits. But the liquidity of government bonds in the current far can not be compared with the liquidity of bank deposits. Asset pricing model determines the non-high interest rates not gilts, otherwise will be lost should the source of the debt.
(C) tax exemption
Western tax system, the tax treatment of debt interest and interest on bank deposits. Tax-free to the former, the latter generally impose a capital gains tax. Bu Zhiyu allowing investors to invest in low interest rates of government bonds caused by the excessive loss of welfare. The national debt is truly gilts.
Our national debt interest and interest on bank deposits are tax exemptions. So, relying on tax incentives balancing both revenue mechanism does not exist as a frame of reference, bank deposit receipts, the Treasury bill rate is only higher Caixing. Taking into account the Government's introduction of a capital gains tax increasing demands, and accompanied by the reform of state-owned commercial banks, investment risk and gradually increase China's national debt currently referred to as "super gilts is not an exaggeration.

the s

super gilts
From the creditor's point of view, holds super gilts is very reasonable. Ricardian Equivalence does not exist in the public debt - the low-income countries, the individual can not predict the future tax liability of the government bond debt service needs, investors tend to see bonds as wealth, and to increase immediate consumption. In particular, the risks and benefits of the ultra-gilt "asymmetric risks to the government at the same time, investors own exclusive high-yield. In fact, this is an illusion, it hides a huge risk.
The basic proposition of modern economics is a "reasonable person" is assumed. Engage in debt financing, the Government must take into account the relationship between risk and return, always raise the risk and cost to reduce as much as possible. While the high cost of borrowed funds, it also release their own risk, and to pass on the risk to the creditor by refinance old debt.
Government fully from the theory method can scroll through the debt to make their own never repay, as long as the credit is large enough, in fact most of the world government is the principal amount of debt as a capital expenditure operation by refinance old debt into debt forever. Largely government bonds are used as a savings of welfare impact of its investors the intergenerational burden does not exist. But the interest on the debt is capital expenditure allocated to the cost of the current period, belongs to a class of recurrent expenditure, it should be borne by the current recurring revenue (taxes) (if do not have the actual payment should also establish a sinking fund with the year tax left to maturity together with payment). This part of the borrowing to advance, essentially pushing the cost of the current period to the future. Such public beneficiaries and the cost burden on people not consistent, it is not only compromised the efficiency of the trade-off mechanism, and make the scale of the national debt to increase in geometric progression. Over time, government debt is bound to get out of control, and so on ad infinitum, risk slowly accumulate. "Super gilts generally make this process as a catalyst to accelerate. The following analysis.
(A) of the debt crisis and the financial crisis
Government debt is not necessarily lead to a debt crisis and the financial crisis, If debt capital efficiency is not high, it will result in the government debt-service burden too heavy, was forced to borrow to refinance old debt, deficit spending self-accumulation and debt the plot interest payment will in turn increase the budget deficit, if you do not raise taxes and cut spending, you have to continue to borrow, caught in a vicious cycle. While the expansion of the national debt scale can ease the current financial difficulties and meet the financial need at the moment, but may push financial crisis.
(B) the aggregate demand expansion
China's treasury bond issue largely constructive bonds, that is mainly used to raise funds, as a real to regulate social needs leverage utility is not obvious. National debt as a lever to use its circulation should fluctuate with the economic cycle and a corresponding increase or decrease. Two decades of China's reform, economic fluctuations, but the national debt issue size curve has been upward sloping, showing a strong expansionary. The national debt either at the date of issue or the repayment period expansionary effect that borrowing bonds, both the expansion of the total effect of the total social demand, but also makes the consumption of the whole community - investment structure is conducive to social changes in total consumption party . In times of inflation (GaoPeiYong 1995), a large number of debt fueled; slump in the economy, the issue of treasury bonds can certainly stimulate output through the multiplier effect, but if the stimulus is too large, it will cause stagflation. At the same time, the financial results of the macroscopic screed economic cycle or larger fluctuations in the economy has been a controversial issue.
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