UK Regions in ‘Junk Bond' Status Due to London's Dominance
The paper, published in the Fiscal Studies journal, underlined flaws in Britain's financial architecture that help to explain inequalities between London and other regions that are among the worst among similar economies.
Investors in British cities other than the capital demand a big risk premium of around 250-300 basis points above projects in London and other European cities, according to the research, which analysed thousands of real estate investments.
The gap is similar to that between British sovereign bond yields and those of Romania or Hungary.
A bigger risk premium means investors seek higher returns, making projects less likely to happen.
'Until now we have had no understanding regarding the extent to which the UK is not perceived by investors as being a single market area,' said Philip McCann, chair of urban and regional economics at the Productivity Institute at Alliance Manchester Business School, who co-authored the paper.
Prime Minister Keir Starmer plans to devolve more power to Britain's regions and boost skills training, but the authors of the report said financial system reforms were missing.
Previous governments have tried to reduce Britain's regional divide, with limited success, including former Prime Minister Boris Johnson's 'levelling up' agenda.
The paper showed much of Britain entered 'junk bond' territory after the global financial crisis of 2007-08.
Past rounds of monetary easing by the Bank of England, including quantitative easing bond-buying, appeared to affect only London and deepened regional divides - a finding at odds with the BoE's view that its policies helped the entire country.
'We now know that this is profoundly not the case, especially with QE, which appears to have had no beneficial commercial investment effects whatsoever outside of London and its immediate hinterland,' added McCann, who has previously advised the European Commission and various governments.
The BoE's mandate is to set policy for the British economy as a whole. Its officials say regional inequality is an issue for the government.
A Reuters analysis last year showed London's share of the national economy has surged by more than 3 percentage points since 2000 to 24%, with no other British region increasing its share.
Comparable data from the EU statistics agency Eurostat show far less polarisation between regions in Germany and France.
The new research said the disappearance of local banking lay behind the increased risk premium in Britain's second- and third-tier cities - in contrast to the United States and Germany, where lenders operate with far more regional autonomy.
'The result is that UK financial markets now have little presence, finance or engagement in the regions of Britain and the commercial opportunities that might exist there,' the paper said.
The authors said revived local capital markets and banking networks, led by organisations such as the British Business Bank and the UK National Wealth Fund, would encourage private investment.
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