Hedging UK Government Risk

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82149750#Comment_82149750

You win this weekends pedant award 😄

Dead_keen

You win this weekends pedant award 

I'm sure someone will aim for the pendant of the month award by mentioning punctuation. Personally, I think that, like with wine, there is nothing to beat a fine comb.

michaels

This thread isn't (wasn't) about whether the UK govt would default on its bonds, it was about whether it would default on its promises to pensioners, the state pension and public sector. Even if the deficit were fully monetised the UK still has a balance of payments deficit that we simply could not cope without (as above, food, medicine and fuel) and thus needs to borrow externally - and if the only lender available is the lender of last resort (IMF, World Bank) then the govt will be forced to accept terms such as tightening its fiscal position which could be done at the expense of pension promises.

Greek pensioners saw of order 30% cut in their state provided pensions. For our household that would be 15k pa. I do not think it is so unlikely that the UK might see similar that I would not be willing to pay an insurance premium to hedge against that risk. The question is then, does such insurance exist and is the cost reasonable or prohibitive?

Dead_keen

The question is then, does such insurance exist and is the cost reasonable or prohibitive?

Let's say I owned some gilts that are currently worth £100,000. I could buy a put option that would allow me to force someone to buy them for £80,000. It wouldn't cost much because there is quite a small chance of the gilts every falling that low. If you chose a £90,000 price then that would cost more. I'd sell you a put option for, let's say, £1,000 if they fall below £80,000 in the next year. But you probably don't trust me enough it that I might be dead or skint by the time you decide you want me to buy them. So you choose a nice regulated insurance company and they will charge you a bit more. Fine. But if the British economy has collapsed, will they have the money to buy them off of you? Perhap, perhaps not. You will never know. But let's say they that it is your (relatively) luck day and they have the cash. You get £80,000. Only a £20,000 loss. And by the time that you £80,000 is only worth £10.50 in today's money. So that won't work. May be you have to say that the purchase price is £80,000 of bitcoin or gold, or something more useful like coffee or pork bellies.

And every year that goes by you will have to spend your £1,000 to be protected, except when it comes to just before the crunch point you won't be able to buy a put option for £1,000 - with a near certainty of a collapse it will cost close to £80,000.

And that is something simple like gilts. For your state pension, what you are really saying is that you want to buy an annuity of 30% of your state pension, payable if the state pension is reduced. I doubt if you can get an insurance policy like that.

For me, the insurance is to have a well diversified equity fund. If my £ cash/gilts collapses in real terms then I'd hope that my equities collapse a bit less in real terms.

StewedApple

https://forums.moneysavingexpert.com/discussion/comment/82150347#Comment_82150347

You continue to compare apples with bananas - the UK government debt is denominated in Sterling - Greece's problems stemmed from the EU bail-out of banks who'd rashly lent money far above the Greek government's capacity to repay its debts.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82150911#Comment_82150911

Plus they did not actually reveal how dire the true position was, until it was too late.

michaels

https://forums.moneysavingexpert.com/discussion/comment/82150911#Comment_82150911

As above a couple of times, the UK has a deficit in goods and services that without foreigners being willing to lend us money would not be possible.

If we are simply printing pounds to cover a government deficit then how many foreigners will want to take such worthless prices of paper in return for real things like food, medicine and energy?

StewedApple

https://forums.moneysavingexpert.com/discussion/comment/82151522#Comment_82151522

I'm afraid speculative nonsense doesn't frighten me.

Like I said, if you're not happy with your holding the easiest thing to do would be to sell your holdings - get back to me when there's no market, and I'll take the bogeyman a bit more seriously.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82151522#Comment_82151522

Maybe you should consider moving to somewhere that is more financially ( and militarily ) secure. The choice will be limited.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82151522#Comment_82151522

Since one person's trade deficit is someone else's trade surplus about half the countries in the world must be in a similar position. Actually more than that given China's massive surplus.