Why does the UK Government have such low interest rates on its debt?

Like the US the UK is facing low interest rates, despite having a high budget deficit and public debt. Why is this?

The UK Government issues its debt in the form of Guilts, currently the interest rate the government has to pay on a year guilt is 0.32%. This is lower even than the base rate, surely investors would be better off just putting their money in a bank account? Well to start with large financial institutions and investors can’t simply put all their money in a bank account, if the bank collapses they will loose all their money (and the government only insures £85,000). [...]

Japans lost decade

Originally began in the 1990s following the collapse of a stock market and property bubble. Inflation is virtually non-existent in Japan and there has been deflation over the years. This has deterred borrowing and spending as people think if they wait to spend they can get goods cheaper, borrowing also becomes more expensive if deflation is occurring. The Bank of Japan has been easing credit until inflation reaches 1%. The BOJ intends to inject some money into the economy through consumer spending and some through the stock market. It is also believed that if inflation occurs that the value of the Yen would fall; making Japanese exports more sought after (since they are cheaper). [...]

US Debt Crisis

The amount of debt the US is allowed to have is set by Congress (American Parliament) and so has to be decided by both the Republicans (Conservatives) and Democrats (Labour).

In 2011 the US was coming up to its debt ceiling (the maximum amount of money the government is allowed to borrow), if Congress weren’t to agree for the ceiling to be raised then the US may have to default on its obligations (interest payments to debtors as well as payments to civil servants and social services etc).
We can see from the graph (source BBC News) to the left that in recent times all Presidents have increased the debt ceiling and borrowed money from international markets (particularly Chinese markets). [...]

Case Study: Kraft’s Hostile Acquisition of Cadbury’s

Cadburys, a British global producer of confectionary was bought out by the American Kraft in January 2010. Prior to the merger Cadburys was listed on the London Stock Exchange under the FTSE 100 Index. It was originally founded in 1824 in Bourneville. Its products include Flake, Dairy Milk and Milk Trays and the firm employed 45,000 people in 60 countries.

Kraft is the world’s second largest food company after Nestle, with revenues of £25.6 billion (2008) employing 98,000 people. They produce Dairylea, Milka, Philadelphia and Oreos.

The hostile takeover was first announced on 7th September when Irene Rosenfeld announced a 745p per share offer for Cadburys valuing it at £10.2 billion. [...]

A Brief Analysis of the European Debt Crisis

The European debt crisis began in 2010 after many countries were beginning to come out of a deep recession caused by the Financial Collapse of 2007/08. Initially it was released that countries such as Greece and Ireland had huge debts. This was caused by previously low interest rates on their bonds, as well as a lack of tax reciepts due to the Financial Crisis and an attitude towards spending and maintaining a large budge deficit through issuing debt. In particular, Ireland (the government) was hit by huge costs in bailing out the banks which cost the government a lot of money which it had no way of regaining. [...]

Why Tesco’s is launching a Price War

Tesco is trying to increase its market share against rivals Asda and Sainsbury’s. By reducing its prices on basic goods it is more likely to get a higher footfall, we would also expect the increase in quantity demanded to offset the money lost due to lowering the prices. This means we would expect the Total Revenue to drop slightly but not by much.

With more people visiting stores to buy these cheap goods they would also see other goods in store such as the electrical and technological goods which they are more likely to buy, again this would offset the money Tesco would loose from reducing their profit margin. [...]

Merger Case Study: Exxon and Mobil

Exxon and Mobil were 2 separate American oil companies that merged to form ExxonMobil in 1998. It resulted in the creation of the largest oil company in the world. This allowed it to reduce its costs. The first thing the new firm did was reduce its workforce by 7% (9000 workers) this is an example of avoiding duplication as these workers were doing similar things when the 2 firms were separate and hence weren’t needed in the unified firm. This allowed ExxonMobil to reduce its costs.

It led to a reduction in competition in the oil industry which potentially could have meant that prices weren’t as low for consumers as they could have been if the firms were competing. [...]