Tuesday, January 27, 2009

Is Britain Facing Bankruptcy?

Recently, the Conservative front bench suggested the spectre of Britain going bankrupt or requiring a bailout like in the 1970s. Although the most recent, bank bailout was very unsatisfactory because the extent of liabilities was left uncertain, bankruptcy seems a remote possibility.

Firstly, public sector debt is 47.5% of GDP. This is forecast to rise to 57.4% by 2012 due to the effects of the recession, bank bailouts and fiscal expansion. In the 1970s national debt rose to over 70% of GDP. After the second world war, national debt was over 125% of GDP (I"m uncertain of exact figure in 1945. It's just amazing that faced with such a huge debt, the government went ahead and created a national health service and comprehensive welfare state!)

source: ons

However, if we ignore the cost of bailing out banks public sector debt is just above 40.5% of GDP. Due to the nature of accounting rules, the effective nationalisation of RBS means we include their liabilities but not the assets such as mortgages and loans. True the recession will cause a rise in repossession rates, but, the majority of loans will be repaid. There is a good chance the cost of the banking bailouts will be at least partly recovered.

But what About the unlimited Liabilities of Guaranteeing Bank loans?

This could potentially expose the government to huge losses. But, the government point out banks are paying a fee for the service and many of the loans will come good. The markets had a less optimistic view leading to a further depreciation in Sterling. But, it is not a complete collapse, more than anything the markets dislike the uncertainty of not knowing the extent of future liabilities.
This scheme does create the potential for large debt, especially if a recession moves into a deep depression. But, it is hopefully not unmanageable.

About 35% of Britain's debt is bought by foreign investors. There is little evidence that this demand is drying up yet. There are bigger problems facing countries like Greece (with 95% debt as a % of GDP)

UK Credit Rating

The credit rating Moody downgraded credit rating of Greece and Spain. It didn't downgrade the UK, because although the outlook was deteriorating in short / medium term this was a response to trying to counter the cyclical recession and so could be seen as a 'calculated risk'

Long Term Pension Liabilities

Another unwelcome issue is the long term pension liabilities which will become an increasing drain from around 2015, as the retired population increases. But, moves to increase retirement age may help.

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