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Jackie Shute, Director, Public Sector Live (PSL)
Carry Cost is a widespread issue amongst many local authorities and mainly takes the form of borrowings having been undertaken on a long term fixed rate basis, and surplus funds being lent out on a short term or variable basis thus being exposed to fluctuations in prevailing rates. The Cost of Carry therefore arises when investment rates fall below the rates at which the funds have been borrowed at.
Treat and prevent carry cost using the 'carry cost clinic' advice below:
The main symptoms that occur are:
Other symptoms that may occur include:
Carry costs are reasonably widespread and can affect over 80% of authorities with indebtedness, to a greater or lesser extent. Historically carry trades were thought to benefit local authorities who were able to borrow long and cheap and lend out at higher rates of interest. Greater acceptance of risk management has challenged this widely held belief and as a result carry trades are now recognised as not always being beneficial.
Other causes can be put down to:
There are of course varying degrees of carry cost ranging from acute cases where cash balances are held purely for liquidity purposes and are inherently needing to be kept short and consequentially exposed to variable market conditions – up to more severe cases where significant balances are held for reasons other than liquidity.
There are some cures available for carry costs, although these may lead to undesirable side-effects in some cases. These treatments include:
Before any of these treatments are undertaken, it is advisable to fully ascertain the risks of each approach and understand the side effects at portfolio level.
For those authorities concerned about this issue, or only showing light symptoms, it is advisable to take preventative action now. This includes:
Remember, you don’t need to suffer in silence, no matter how far progressed the problem is, it’s not too late to take action. Public Sector Live can provide you with a confidential independent examination and provide objective quantification and analysis for further discussion.