Leading financial historian says UK next in sovereign debt crisis, then US

Thrugelmir

For younger posters. Reading the National Archives gives a true picture of events in 1976.

Though $4 billion seems small in terms of the mess we face now.

In 1976 Britain faced financial crisis. The Labour government was forced to apply to the International Monetary Fund (IMF) for a loan of nearly $4 billion. IMF negotiators insisted on deep cuts in public expenditure, greatly affecting economic and social policy.

http://www.nationalarchives.gov.uk/cabinetpapers/themes/imf-crisis.htm#The%20$3.9%20billion%20loan

michaels

Don't forget we also run a balance of payments deficit on things a lot would consider essential (gas and food for example) - suppose no one is interested in GBP or GBP debt how will we pay for that?

Rochdale_Pioneers wrote: »

No. We can't. set aside politics and ask an economist how Britain - which prints Sterling - can possibly default on its debts - which are payable in Sterling.

he ratings agencies have already said that they can no more downgrade us than they can the US and its for the same reason. Its the same reason why Japan can run a deficit for a decade and borrow triple what we do and not go bust.

Sure, its not advisable. Its not smart. But we physically cannot default and go bust. Despite all the Tory froth about how appalling the UK economy is, with the various fictional figures of how much debt we really have, the reason why the markets are talking about the PIGS, then the Baltics and Eastern Europe - and not the UK is very simple. We - unlike them - have no risk of going under.

It would be nice to have a sensible debate about economics without having to discuss paranoid wet dreams about bankruptcy and the IMF. Its not going to happen.

Degenerate

michaels wrote: »

Don't forget we also run a balance of payments deficit on things a lot would consider essential (gas and food for example) - suppose no one is interested in GBP or GBP debt how will we pay for that?

GBP will never become worthless while there are assets worth having in the GBP economy. As the currency falls, demand will pick up when those assets start to look like bargains, and an equilibrium will be reached. This is obviously going to happen a long time before it's possible to buy Vodafone for $10. £200B extra created by QE hasn't changed this fact. Even outright monetization of the entire ~£900B outstanding government debt would not change this fact. Creating more of a currency dilutes the value of what is in circulation, but it takes a truly collosal printing effort to cause a genuine Zimbabwe/Weimar style currency collapse. No British Government is going to go mad with the printer to the point of issuing trillion pound notes to pay the milkman, so GBP will remain a sellable currency, even if sometimes we find ourselves paying more for forex than we'd like.

As for 1976, one school of thought that says Britain simply didn't need the IMF loan at all - it was a panic-reaction by politicians that were still stuck in the Bretton-woods mindset and unused to the vagaries of a floating currency regime. They should have left it to the market and the pound would have found its level, as it did soon after, although the crisis did at least force some necessary changes in policy.

Degenerate

Thrugelmir wrote: »

If everyone took a cut then the economy would soon roar into life. As the spare capacity would generate growth.

You appear to have entered a parallel dimension where the normal mechanisms of economics work backwards. Is your real name George Osborne?

Thrugelmir

Degenerate wrote: »

You appear to have entered a parallel dimension where the normal mechanisms of economics work backwards. Is your real name George Osborne?

I've been outed!

Generali

Rochdale_Pioneers wrote: »

Its blindingly obvious that a country of our size selling government debt in a currency that we both control and print is not the same as a small country owing debt in a currency they neither control nor print. We are not Greece. We cannot go bust. We can sustain both the deficit and our debt to GDP ratio (which even now remains lower than France, Germany, America et al).

The problem (as you acknowledged on another thread) is that index linked promises have been made in addition to the debt and these will have to be defaulted on as you can't print money to pay them as it is self defeating.

Jonbvn

Rochdale_Pioneers wrote: »

Sure, its not advisable. Its not smart. But we physically cannot default and go bust. Despite all the Tory froth about how appalling the UK economy is, with the various fictional figures of how much debt we really have, the reason why the markets are talking about the PIGS, then the Baltics and Eastern Europe - and not the UK is very simple. We - unlike them - have no risk of going under.

It would be nice to have a sensible debate about economics without.....

.......the same old tired nuLiebor spin!;)

Spiv_2

But the two most important reasons to sleep more soundly tonight than the Greek prime minister are the average maturity of our debt, and the pound.

According to the Debt Management Office, the average maturity of UK sovereign debt is 14 years. In the US, it's about four years. In France and Germany it's six or seven. In Greece, it's even lower - as I mentioned yesterday, they have about 10% of their debt coming due in the next few months.

That makes an enormous difference to the amount of gilts we need to ask the debt markets to buy in a given year. It also means that even fairly large increases in funding costs will only have a gradual effect on the cost of servicing UK debt. That burden is still lower today, as a share of total spending, than it was for most of the 1980s and 1990s.

For Greece, debt servicing costs now account for just under 12% of GDP. In the UK, it's costing less than 3% of GDP.

You might be surprised to hear that Germany, France and Italy are all going to be issuing more sovereign debt on the markets in 2010 - even though our budget deficit, in absolute terms, is more than double the size of theirs. That is entirely because of the relative maturity of our debt.

Take Germany as an example: its budget deficit in 2010 will be about 140 billion euros, whereas ours will be about 190 billion. But because of the amount of debt it has coming to redemption, Fitch, the ratings agency, reckons that Germany will be looking to issue about 386 billon euros in new sovereign debt this year.

The estimate for France is 454 billion. Whereas the UK will be issuing a "mere" 279 billion. That is one reason why French CDS spreads have crept up a bit as well.
And then there's the final reason to feel a bit more cheerful: the pound. We may be talking about a currency crisis in the eurozone. But, arguably, a big part of the problem for Greece - at least from the standpoint of international investors - is that it can't have one. Its currency can't devalue independent of the rest of the eurozone.

As Michael Dicks pointed out in his recent contribution to the IFS Green Budget, if you're thinking only about the currency, we've already had our crisis. The pound fell further in 2008-9 than during any of the sterling "crises" of the 1960s and 1970s. Or the ERM.

We could face an uphill struggle exporting our way out of recession, especially when most of the rest of the world is trying to do the same thing. But a 25% devaluation is a good way to start.

We're facing some enormous challenges coming out of this crisis - fiscal and economic. Given the rate at which our debt is climbing, the clarity of politicians' commitment to bring down borrowing will be crucial to how we fare in the markets over the next year or two. But, you will be relieved to hear, the government - any government - will really have to work hard to turn us into Greece.

Stephanie Flanders

http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/

StevieJ

aelitaman wrote: »

IMF 1976. When a country calls in the IMF it is akin to a business calling in the reciever.

Oh really, just as we were about to turn the free flowing taps on North sea oil, I would call it more of a loan

Generali

StevieJ wrote: »

Oh really, just as we were about to turn the free flowing taps on North sea oil, I would call it more of a loan

I'd describe it as more of a a stroke of luck - just as the country is wading into the brown stuff, the price of black gold rises substantially and the deficit is no more (or more correctly drastically reduced).

Fundamentally the UK has a massive problem in that pretty much every year since 1970, the Government has spent more than it has taxed (before unaccounted for liabilities before any bees find their way into bonnets). You can't spend more than you earn indefinitely, although it seems you can for 40 years.

Other countries (eg France and Italy) have bigger problems than this but if you're starving then it's cold comfort to think that you're better off than the bloke across the way who already starved to death.