How Much Spanish Government Debt Should the UK Government Take On?

Generali

There has been some discussion on another thread about the solvent countries in the Euro bailing out the 'PIIGS' (Portugal, Italy, Ireland, Greece, Spain). So I was wondering if the UK Government was asked to help (as a fellow EU member country it would be highly likely IMO), how much Spanish Government debt would you be happy for the UK Government to take on?

1984ReturnsForReal_2

£1......

Token recognition

jd87

Hah!

That is all.

Degenerate

Absolutely zero. We had the sense to stay out of their idiotic currency experiment - those countries whose leaders put politics above economics have to deal with the consequences themselves.

I don't think it likely either - any deal that requires help from outside of the Euro-zone would amount a failure of EMU, an admission which the Euro-zone leaders are not yet ready to make. I expect them to limp along with sticking-plaster deals until the pressures become too much to bear and wholesale breakup and defaults become inevitable.

HAMISH_MCTAVISH

Absolutely right Degenerate.

This is a problem for the EMU states to resolve. But at the end of the day, they have little choice.

They can either stand back and watch as the PIIGS burn their currency to the ground, triggering an inflationary crisis in France, Germany and the Benelux states, or they can backstop the debts of the PIIGS in return for concessions around fiscal cuts, give the bond vigilantes and speculators a good kicking in the process, and prevent the contagion from spreading.

I know which one I'd choose. In fact, there is really no choice at all.

Nation States bring a whole new meaning to the term "too big to fail"...... As once you start toppling those default dominoes, there is no way to know where it could end.

The UK's banks are exposed to a quarter of a trillion pounds in loans to Greece alone, its surely over a Trillion, maybe much more, to the PIIGS combined. And other European countries are on the hook for far more.

Generali, if you can think of a way where default of one or more of the PIIGS doesn't take down the global financial system with it, by all means feel free to share it with us.

Until you can do that however, I wouldn't be betting against them.

Radiantsoul

I can see an interesting parallel between this and the pension thread.
There is agreement that public sector pension are underfunded/ But in accordance with modern accountancy standards, it would be pretty hard as you would need to mark to market the value of the funds and it seems that this would probably rule out the stock market. So instead the assets would have to be soverign debt and some very high quality bonds - probably overseas assets.

Perhaps any debt acquired could be the start of a pension fund.

In terms of the original question I suppose it depends on the costs of a Spanish default. The governments of the world fluffed Lehmans, assuming the impact could be contained when it couldn't.

I suppose that a Spanish default might raise UK gilt rates by a 1-2%. We are borrowing a little shy of £200bn, so the cost of higher rates on gilts of a Spanish default would be £2-4bn.
We also export about £1.5bn to Spain per year, and so a drop in trade ought to be pretty minor in comparison.
As a complete default is pretty unlikely(even a haircut seems unlikely), the biggest risk is probably the euro falls against sterling. Factoring in a 25% and you would say the UK perhaps ought to be prepared to spent £8-16bn. Of course this assumes it would work and Spain will not default anyway, a risk of failure would reduce the value. But I have assumed gilt rates would rise for just one year.

dealsearcher

We wisely stayed out of the euro, although it was not for the want of trying by some politicians and some members of the public who liked the 'convenience' of not having to change currencies when they travelled. However we are in the EU and as such it may well be we can not avoid being effected by this. Not fair I know but then many who were sensible and prudent in the good times are now being effected by the recession. Life's not fair unfortunately.

Generali

HAMISH_MCTAVISH wrote: »

Generali, if you can think of a way where default of one or more of the PIIGS doesn't take down the global financial system with it, by all means feel free to share it with us.

Countries default all the time, this shouldn't be any different.

I think the case to answer is more that when countries have defaulted in the past they haven't brought the system to its knees so why would that happen this time.

Of course the biggest problem really is that countries have made themselves insolvent by taking on private bad debts which was always lunacy.

It's interesting to note that nobody at all that has voted so far thinks it's a good idea for the UK to bail out Spain. I shouldn't imagine a poll on Geld sparen Experten dot com would come out any differently.

michaels

Hmm - but what would a Spanish default mean for Santander who own a large part of our banking system - would this require a UK paid for rescue a la icesave? How much would that cost?

HAMISH_MCTAVISH

Generali wrote: »

Countries default all the time, this shouldn't be any different.

IMO, the risk with the PIIGS is that the fall of one triggers the fall of them all.

Has a member of the EMU ever defaulted before? How about 5 at once?

What do you think the implications would be for the Euro? And the knock on effects for France, Germany, Benelux, etc?

I think the case to answer is more that when countries have defaulted in the past they haven't brought the system to its knees so why would that happen this time.

Do you think the global financial system, having just been bailed out at tremendous cost to avert disaster, is currently strong enough to withstand a default by one or more of the PIIGS?

I very much doubt it.

It's interesting to note that nobody at all that has voted so far thinks it's a good idea for the UK to bail out Spain. I shouldn't imagine a poll on Geld sparen Experten dot com would come out any differently.

We are not a member of the EMU. It should not be our responsibility to bail them out, it should be France or Germany that does it.

But....

If the choice was the UK, as part of the EU, guaranteeing some amount of PIIGS debt, or all the UK banks failing due to a default of one or more of theose countries, then the guarantee would have to be the only option.

And much as people would dislike doing it, they would have no choice.

HAMISH_MCTAVISH

michaels wrote: »

Hmm - but what would a Spanish default mean for Santander who own a large part of our banking system - would this require a UK paid for rescue a la icesave? How much would that cost?

With the interconnection of systems these days, there would be no way to contain the contagion.

Letting Lehmanns fall was a stupid mistake, that almost took out the global banking system.

Letting an entire Eurozone country fall is a mistake on a whole new level, and the consequences could be far worse.