Questions asked by attendees
The following questions were asked by the audience during the webinar and the panel wanted to take the opportunity to follow up.
The webinar can be watched on-demand at the following link: https://www.treasurers.org/events/webinars/experiences-of-established-treasurers
Q: Given the expected interest environment hike, what are the plain vanilla instruments that treasurers could use to remain flexible and achieve yields? Are MMFs with short duration the best solution available?
Our view on liquidity management would be: keep it simple, target a balance of o/n or short dated deposits and a blend of term cd/cp, perhaps a few 1 yr FRNS in well rated entities which at present offer reasonable value and will track rates, but assume zero secondary market liquidity especially around quarter-ends. If you are likely to have some flow that might require asset sales then the one truly liquid asset is UK treasury bills.
MMFs probably are, because if they do what they are meant to do you will have easy access to your cash, a diversified investment and a yield that will track market moves. A MMF will be defensive (this is a positive) in a rising interest rate environment.
One solution would be to have a mixture of both – run your liquidity via MMFs and avoid the ‘expensive’ short dated products offered by banks and if you like term yields have a few selective direct investments for the additional pick up in return.
Q: Does this rise in interest rates create a worry given the explosion in Buy Now Pay Later?
A worry for whom? – certainly individuals with high levels of debt – and the institutions providing the credit. Fortunately, most banks have sufficient capital adequacy to cover likely scenarios.
Q: Can I ask the panel’s view on the way that banks are looking after clients at the moment? As we move from QE to QT, liquidity will be removed from the system, but it is a slow process. Banks are looking for longer term funding as opposed to short term funding, and clients are often restricted on placing longer term funds. As an additional point the move from LIBORs to RFR’s has created a lower rate curve for deposits, are banks playing fair?
With a few exceptions, by and large banks don’t really need cash. However with QT (and in Euro the unwind of TLTRO) it will be interesting to see if appetite for funding returns (and with it slightly higher returns relative to benchmark). The issue re long term funding v short term is a problem across the sector – MMF regulation requires high level of short dated liquidity, bank regulation requires longer dated funding, but investment in an MMF can sidestep this issue.
Re RFRs Sonia referencing issuance is largely driven by cross currency dynamics so if GBP produces cheap euros or most probably USD then levels may seem fair, but natural sterling requirement is limited. We would be wary of liquidity in floating rate CDs.
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Banks are doing what is right for their stakeholders – principally their shareholders and employees. It is companies’ responsibility to manage their balance sheets in accordance with market conditions. The move to RFR’s has been largely driven by regulators, including central banks, rather than commercial banks.
Q: We bought Euros in millions in end FY 2021 to payoff heavy equipment in the coming two years. Euro went down during FY 2022 and huge forex losses were recognized in monthly FS. How should treasury satisfy the management as all blame is put on treasury from all sides?
This is a question of education within the organisation. Treasury are financial risk managers so would, in general, only be hedging future exposures in response to activity within the business. By buying euro, the organisation obtains certainly (it’s effectively a form of insurance) – there is no guarantee it will be the ‘best’ outcome. Treasury may want to revisit their hedging policy (eg do they regularly buy currency to meet future requirements, so smoothing rates?) there are resources on the ACT website (e.g. Risk management resource centre | The Association of Corporate Treasurers)
Q: How does inflation affect working capital?
John covered this on the webinar
Q: What surprised you most about the impact of inflation that you think would be useful to our audience today?
Covered on the webinar
Q: Energy prices in the mid-1970's, the UK called in the 'IMF'. Can you elaborate what happened with this please?
The Bank of England website has several useful articles covering the background to this. (for example: https://www.bankofengland.co.uk/quarterly-bulletin/1978/q2/the-secondary-banking-crisis-and-the-bank-of-englands-support-operations)
Also some thoughts from our panel (which may seem similar to certain more recent events):
Barber boom
By the start of the 1970s the post World War II recovery was coming to its end and UK growth faltered and inflation rose. In 1972 the Conservative government used both lax fiscal policy (government spending/tax reductions) and lax monetary policy (encouraging bank lending). The boom that followed (the Barber boom, named after the Chancellor at the time) drove domestic inflation (a wage-price spiral) and was unsustainable, weakening the pound.
1973 oil crisis
This collided with the 1973 crisis that reduced shipments of Middle Eastern oil as a consequence of the Yom Kippur War between Israel and a number of Arab states. The oil crisis boosted inflation and reduced demand in developed economies – producing stagflation or outright recession. The pound continued to weaken. The Labour Party won the 1974 election.
1976 financial crisis
Things staggered on under Labour, economic growth being re-established by 1976 but inflation, above 10% under the Conservatives had risen above 20% and unemployment had doubled since the start of the decade. As the UK economy seemed to continue to weaken and Sterling continued to fall, the government needed to regain some credibility. Denis Healey went to the IMF to borrow funds to give confidence and to buy time to implement programmes of cutting government expenditure, rein in monetary policy, etc. He agreed a facility of $4Bn, actually borrowing only half of that. Stability of a kind was re-established and growth returned. The IMF borrowing was paid off early in 1979. However, UK unemployment at the end of the decade was more than three times that at the start
1979 oil crisis
The Shah fled Iran in January 1979. Iranian oil production was disrupted by the revolution and became low in volume and unreliable, forcing up the oil price again. Oil had been a few dollars a barrel in 1970 but went above $35 by 1980. The peak was probably more due to hysteria than shortage, but gave oil producers a boost they naturally sought to retain.
The effect on Sterling is illustrated in this chart taken from Wikimedia Commons:
Q: How comparable are different inflation indices across countries?
Not directly comparable, but a useful guide over time.
Q: Why have central banks chosen to hike rates before QT?
One to ask a central banker I’m afraid
