European borrowing: The ugly truth
Fitch, the ratings agency, has just brought out a special report on borrowing by European governments, and whether it's sustainable. The headline conclusion supports what I said yesterday: they think that the rise in debt levels is manageable for big countries like the UK. But the fine print is not very reassuring. .
Fitch projects that European governments will have to raise a grand total of nearly 2 trillion euros in 2009, or 17% of GDP. That's 45% higher than last year. Borrowing by the five largest borrowers - France, Germany, Italy, Spain and the UK - will be at a record level relative to GDP.
The figures are even worse for some of the smaller countries: Ireland needs to raise 47bn euros on the markets this year - a whopping 26% of GDP.
The sheer pace of the downturn in EU budgets is down to a combination of worsening economic news and governments' stimulus efforts. Fitch reckons that gloomier economic news since September will add, on average, another 1.5% of GDP to government deficits.
Some are now expecting further revisions to the UK's deficit numbers as a result of last week's dismal GDP figures for the last quarter of 2008. We won't find out the scale of the damage until the budget - although the Institute for Fiscal Studies will be giving its best guess in its Green Budget tomorrow.
For what it's worth, I don't expect the budget to show borrowing revisions for this year of much more than 0.5% of GDP - around £10bn. But that's only because the government forecasts were so recent, and already so gloomy.
Fitch thinks the UK's deficit will peak this year at 8.3% of GDP - second only to Ireland. But, interestingly, our funding needs for this year are actually lower than the other large economies because we have relatively little old debt coming up for repayment.
That's good news, for this year. But it could store up problems for next year, because few expect investors to remain quite so keen to buy up sovereign debt.
As I said yesterday, the Treasury is still borrowing very cheaply - the interest rate on 10-year debt is about one percentage point below where it was last summer. That's because investors everywhere are still seeking the safest investments around, and even high-grade companies are cutting debt, not looking for more.
That won't be true forever (or let's hope not). In a year or so, government debt management offices might find themselves in a more competitive market.
The Fitch report raises another, related, worry. The uncertainty about the future means that investors at the moment like short-term government paper best - interest rates on short-term debt have fallen most of all.
If European governments all rush to save money by creating more short-term debt, that could raise problems down the road when conditions change, and they all find themselves simultaneously trying to roll over a lot of debt.
The heads of the World Bank and IMF yesterday criticized governments for not co-operating more in the face of the crunch. He was talking about bank bailouts and fiscal stimulus programmes. But the dry - increasingly central - area of debt management is another where countries might do well to follow their lead.
Update 1312: Several of you have asked whether we should put any store by a report by a major ratings agency. Wasn't it this kind of paragon that got us into this mess, by thinking you could turn risky sub-prime assets into triple-A?
You have a point. After the mistakes - if that's not too small a word - of the last few years, it will take time for the big ratings agencies to regain their credibility. If they ever do.
Trouble is, at the moment the ratings agencies have a pretty critical role in the global financial system. In fact, the new Basel II accord for bank capital standards makes them even bigger players. That may change. But whatever their past failures, regulators and governments have not yet come up with a better way.
That makes the views of the ratings agencies important - even if they might be wrong. That's especially true for governments. If the major ratings agencies don't think the UK is going to have trouble managing its public debt - and so far they don't - then the UK will keep its triple-A status. That, in turn, makes its easier for the government to borrow, and a serious debt problem that much less likely.
As we've learned, the fact that a ratings agency says something doesn't make it so. But in the imperfect financial system we all still live in, it sure does help.
~RS~q~RS~~RS~z~RS~48~RS~)
I'm 
© MMXI
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Borrow now and spend tomorrow's earnings today.
Why do we need tomorrow's earnings tomorrow, anyway?
In a sensible world, when GDP is contracting, borrowing must also contract, to balance assets and liabilities. If we spend more than we earn, we will one day run out of money.......
Tomorrow will see low economic growth, burdened by high debt and high taxes. This means the private sector will not be able to afford to employ new staff or invest in new business opportunities. This will cause unemployment to stick around 3 million.
It will be a very difficult cycle to break.....
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Not so sure whether the recent government figures are gloomy enough. Brown, Darling and Mandy estimate a 57% debt-to-GDP ratio by 2011, compared to the 72% per 2010 estimate from the European Union put out only two weeks ago.
The more fundamental issue is that you can not solve this debt problem by assuming more debt. The UK savings ratio was 0% in 2005-6, so even without the increase in unemployment UK GDP was some 5% to 6% higher than sustainable (assuming a move to a 10% savings ratio and consumption being about 60% GDP).
The results of higher debt may well be what MrTweedy (post 1) expects in his last paragraph: sluggish recovery at best, with hardly any new jobs and everyone crippled by higher tax, except civil servants, politicians and BBC staff.
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If Fitch say it - it must be right.
Quick question though, according to their brochure they seem to be active in Financial ratings. I wonder who the clients were and if any ratings were given to financial bundles of debt. If so it will be interesting to see the default on their AAA ratings post 2005.
If they are not in this market the apologies but I do get a bit cynical nowadays.
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"That's because investors everywhere are still seeking the safest investments around, and even high-grade companies are cutting debt, not looking for more".
Proof that "High-grade" companies are given that title for a reason - they know how to run their businesses well.
High-grade companies are reducing their borrowing, because they know it is the best way of protecting their future earnings and their cash flow.
What sensible company wants the burden of debt and interest payments when the world economy is shrinking so quickly?
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Stephanie,
It is widely accepted that all ratings agencies have been fellow travellers in contributing to the bubble economy. It seems, at the very least, unwise to put much weight behind any figure that they produce in the current circumstances.
It is still disturbing that, as you write, "the Treasury is still borrowing very cheaply" - implicit in this is the underlying suggestion that cost will rise substantially due to market forces.
The relative weakness of Sterling will eventually get through to lenders and the cost of borrowing will go up, along with a more sanguine assessment of risk.
I again reiterate my point about the pusillanimous Bank of England - they are doing us no favours as a Nation by not pursuing a hard line on increasing interest rates, or at the very least stating that they intend to do so by, say September 2009. The effect of such an announcement will be to calm the markets and enable the Treasury to continue funding its needs at a low interest rate for now. If they fail to do this there will inevitably be an interest rate shock and a further, completely avoidable, economic collapse.
I would be far happier about any and all economic 'predictions' if the uncertainty was quantified (i.e. +- 100 percent or whatever) without such information the central prediction is worse than useless. Economics is just a political pseudo-science with no numerical rigour, without realistic estimations of uncertainty and error in base data and in consequence projections.
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Holy smoke, I made a counting mistake and should have referenced MrTweedy's fourth paragraph in the first post here (or second paragraph if you don't count the first two sentences spaced apart as paragraphs).
Before you ask, I do know the result of 5 x 52, or 52 x 5!!!! Funny that it isn't the same, isn't it (just) - only joking
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MrTweedy (this time post 4) seems a very sensible man indeed. Nice contrast to the government, which wants individuals to buy houses with mortgages when prices fall or entrepreneurs to borrow for inventory that can't be sold as consumers retrench and unemployment increases.
When will the government and the BBC get it? It is perfectly normal for banks to lend less and for companies and individuals to borrow less at this point in the cycle. It is very necessary for the UK and the US since their savings ratios were -0.5% and 2% respectively in 2005-6, before the current jump in unemployment. Otherwise you would compound the sour assets problem that the banks are already nursing.
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OK, so, in the best traditions of "Have I Got News For You" it's time for the Odd One Out round.
Which is the odd one out of the following: Germany, France, Italy, UK, Spain? It's not the most difficult question - even Ian Hislop would probably get it!! The answer is the UK, as all the others share a common currency.
So, if the speculators take a dislike to the UK situation, they can, as they have already done, sold the UK currency, resulting a helfty devaluation, and a lack of stability for businesses, especially importers whose costs have risen exponentially, but are unable to pass the costs on to end users.
If they are worried by the fiscal situation in any of the other four, they can of course sell their currencies, with, undoubtedly the same result - but with one very important difference. That is that no matter what happens to the Euro exchange rate, all the other four nations mentioned, and the rest of the Eurozone will see zero impact in the costs of goods and services between their respective countries, giving more stability - which is / was the whole point of inventing the Euro. Sure, if the Euro fell against the US Dollar, then commodities priced in the US currency would rise in price in euro terms but this would be the same for the entire block and internally trade between the Eurozone countries would be uneffected.
Of course the UK simply couldn't join the euro at todays low rate - we wouldn't want to, and probably the rest of the Eurozone wouldn't want us to either. We should however have done so back in the 1990s, when the currency was set up, and to negate a repeat of the problems we have currently, we should do when the exchange rate returns to something more reasonable - say EUR 1.25.
Historians will look back on the UK's failure to take the "safety in numbers" route as a major error in UK economic policy, and one driven not by economics but an urge, by New Labour, to do what was popular, rather than what was right.
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The figures that we really need to see are "net tax receipts" because this will demonstrate just what kind of deficit Crash (he save every one of us) and Comical Ali are running.
If those numbers are being kept secret, and then suddenly revealed to be completely catastrophic...as per the RBS recent announcements after their placings for new shares...then will the worlds bankers who have bought those "debts" actually just turn away? Will we then get an investigation? Is anyone accountable? Will we be left with junk bonds?
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No. 7. Econoce
Thank you for your agreement.
I do not want businesses to suffer, but borrowing more money when earnings and asset prices are falling will only make things worse. As you say, such a course of action is more likely to add to the sour assets problem, rather than alleviate it.
Those companies with low overheads and low debt burdens will be the first to react and take advantage of any business opportunities in the future. Low debt is in itself a competitive advantage.
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Not sure why the new Basel II accord for bank capital standards makes the rating agency even bigger players. If, like most of banks in the UK, you are planning NOT to use the standardised approach, then you will use your internal rating to calculate your regulatory capital and NOT external ratings!
Concerning the rating agencies it might be worth to understand first what a rating means! The rating is generally related with an EXPECTED loss. AAA tells you that you expect the losses to be very small. But this is not risk, risk is the UNEXPECTED. Rating does not tell you much about unexpected or volatility. When you know that these two quantities are driven by correlation maybe it is then you should start worrying!
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#8
If you think investors class the Euro countries you list as equal risk then I suggest that you check out the spread on Government Bonds.
Portugal, Italy, Greece and Spain would have benefited in recent years from the flexibility to adapt their interest rates to cool down their domestic boom but instead the ECB kept rates low to help Germany and France. How their economies are suffering now!
In the UK we had the interest rate flexibility but Our Beloved Leader made sure that the BoE were unable to allow for house price inflation when setting interest rates. It would also have helped if the Government hadn't gone on a spend/borrow binge of their own.
Neither system is perfect but I believe that the additional currency/interest rate flexibility we enjoy by being outside the Euro will be to our benefit in the recovery cycle.
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Dear Stephanie,
Doom and Gloom, AH!
But, okay we are Bust,, ! " so what happens now."?
This is not about how much its going to cost us, BUT one question no one will Answer,
"Where has all the money gone and who's got it now?"
"Where is the British Money"? The Balance sheet does not add up, and its no good moaning about it its only money after all.
that is the real problem Money, what do they say money makes the world go around, and we should be making love not war, Here lies the answer get rid of everything Military, and look at the balance sheet then it will be heavliy into the black.------ oh and MOD procurement that'll save Billions.
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Stephanie,
Welcome back! We missed your analytical thought and your wit especially in these extraordinary times but, the problems being far from over, you're already bouncing back.
wish you the best
e
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# 13
Absolutely not - I am sure that there is a big difference between say Germany, and Greece.
However, from the point of view of cross border trade, then it matters little what investors believe the risk is for individual countries, the value of the currency will remain more stable - unless of course one of the major engines of the Eurozone economy goes pear-shaped. If that were to happen, and the value of the Euro fell, then as I mentioned before the effect of intra state trade would be zero - unlike what has happened to the UK, where the cost of imported goods and services from the Eurozone has risen by 20% and more in the last 12 months.
In the "real" economy the stability of being inside the eurozone, as opposed to outside it has to be better.
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Stephanie wrote
On Rating Agencies
"As we've learned, the fact that a ratings agency says something doesn't make it so. But in the imperfect financial system we all still live in, it sure does help."
The last sentence of your update indicates the role you see for 'economics' in this present problem - and that is to 'help', Perhaps you should define who or what you intend to help?
Is it the right and proper role to help the the status-quo-anti to be maintained? When it was precisely these structures of economic management that contributed to the magnification of the structural economic insatiabilities that gave us the bubble? (And where there is a present disjoint between rational economic management and present actions incidentally.)
What you say about the ratings agencies really does indicate that it is a matter of prime importance that Governments get together and find another more trusted method of rating debt.
I also think that BaselII is basically dead in the water. Indeed preparation for BaselII may have contributed to the bursting of the bubble.
For example: The change from a situation of regulatory arbitrage where international institutions, frankly fiddled, their supervision to where they could get away with what they wanted to do to a future situation where they feared this would no longer be possible should have been seen by the regualtors as a very very risky thing to do. This put considerable extra stress to hide all of the nonsense in the accounts in time for the change, and like Enron this may have been the straw that broke the camels back.
I can think of/know of several other pit-falls that were not foreseen by the regualtors in setting up BaselII, but I will not list them here.
#12. CockedDice wrote:
"I believe that the additional currency/interest rate flexibility we enjoy by being outside the Euro will be to our benefit in the recovery cycle."
The flaw in your argument is that we are not likely to use the 'flexibility' sensibly for a couple of reasons - The Bank of England could /should/knew it should have, done more to cool things in the last decade - what evidence do you have that it will do so in the future? And, you have also entirely discounted to countervailing argument of having access to a home market of ten times the size all using the same currency.
I have no confidence that the Bank of England will either do or be allowed to do what it thinks best let alone the right thing - again this opinion is based upon their performance in the last decade under the present Governor.
It is the actions, and inactions, of the Bank the FSA and the Treasury that have so magnified our present difficulties.
Let us, as a Nation, get back to making things and selling them and looking for the most efficient administrative arrangement of money that minimised the impact and influence of Bankers (i.e. the Euro: better in than out as it will minimise administrative costs in trading with our home market - proviso at the right exchange rate.)
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#16 JfH
The BOE certainly knew it should have done more over the past decade but it was shackled by the constraints of the inflation target remit given to it by the Government. Whether lessons will be learnt is unclear but at least the opportunity is there.
Having a larger 'domestic' market may reduce the currency factor but it hasn't helped stabilise the smaller economies to date - the euro is currently too strong and interest rates were previously too low.
For the largest economies that can ride out these factors I believe political difficulties will come when at least 1 Government is elected in a state that wants to leave the Euro - it will happen!
I agree with your point that we need to move back to a strong manufacturing base but who is going to buy these goods? Increasingly it will be China, India, Russia, Middle East and other fast growing economies - are any of these likely to join the Euro in the near future? Germany is the world's largest exporter (or was until recent currency movements) largely on exporting its luxury brands outside the eurozone.
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Ah - so here we have it.
Even though we know the agencies lied - sorry 'got it wrong' before - we have no choice but to believe them because there isn't anyone else to believe????
Seriously - is this the king with no clothes or what?
The agencies didn't just get it wrong - they did 2 things:
a) They trusted people who were untrustworthy, but who had shared interests (the banks packaging the debts) and therefore were deemed to be 'alright geezers'
b) They didn't do their job properly by understanding exactly what it is they were rating, and what it contained.
When I explain to 'ordinary' people what a CDO is and how it's put together - they cannot believe how easy and simple a scam it was. They also have a myriad of questions about how it could possibly happen.
It's akin to the 'black bag con' where stooges were placed in auctions to convince the 'punters' that the deal was a good 'un.
It's proper Arfur Daley stuff - all expected in Peckham - but completely unbelievable in the so called 'regulated city'.
This is where the confidence went in the Economy. The general public is slowly realising that it was right all along (give or take) and that so called professionals were talking out of their backsides.
How could anyone be expected to trust them again. Once bitten - twice shy?
Break the cat out of the bag Stephanie - it's simple.
WE HAVE SYSTEMATIC FAILURE, MASS INCOMPETENCE AND CORRUPTION AT THE HIGHEST LEVELS OF GOVERNMENT AND BUSINESS.
You might be better off spending your time listing out the responsible people (in no particular order)
1 - The Regulator(s)
2 - The Governments
3 - The Banking system and Central banks
4 - The Free market Economists
5 - Lehmans, Citi and US banks who created most of the CDO's
6 - The compliance officers in all these banks
7 - The poor education system that is producing people that you realy can 'fool all of the time'
8 - The accountancts who saw all this going on and said nothing
9 - Every UK chancellor since Dennis Healy
10 - The US equivalents (The infamous Greenspan put)
11 - The media for wasting their time reporting on z list celebrities when they should have been using their investigatory powers to look into the inevitable collapse of Capitalism and western economic theory.
You may of course extend this list as you wish...
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Stephanie is right. Fitch may have totalled up the figures in ways that are imperfect three ways from never-never land; but the borrowing figures for Europe like those for the USA are going to be immense. Worse, they are going to make investors very nervous and wreck economic confidence if Governments do not show a reasonably co-ordinated and confident front in facing them.
Further, the deficits are neither sustainable nor curable without sharp economic contraction unless the principal savings and surplus countries - China in the lead - expand demand. We are faced with a most inconvenient truth: we must make world economic co-ordination work.
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#16
"And, you have also entirely discounted to countervailing argument of having access to a home market of ten times the size all using the same currency".
Exactly that - whilst the one size fits all interest policy is not perfect, the same thing applies, though on a smaller and less extreme scale between the regions of the UK.
At least however those involved in international business, both export and import can at least have some measure of stability within the eurozone.
By the way, how refeshing it is to be able to conduct a discussion on the merits of the euro and the economy without the ultra sceptics hijacking the arguement!!
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Why the Euro and Europe is vital for the eventual recovery from this present disastrous economic catastrophe.
On our future markets in the World:
#17. CockedDice wrote:
"... Increasingly it will be China, India,..." but is it not also true that one of the things that makes China strong is its huge home market - they do not sell much abroad -, and in the future this will apply to India too.
We have the opportunity to gain the same structural advantage that helps China and have a 'home market' of about 500 million relatively wealthy people (in Europe) all using the same currency - incidentally who are our major trading partners.
The same is true, but to of a lesser extent, for the USA and its internal market. The stability of costs and prices let business plan and reduces risk.
I hope you are wrong about the Euro, for if you are right, then we will have a very much more uncertain and difficult future, in or out, and can look froward to several 'lost decades' when our children will ask "daddy/mummy what is economic growth?"
Collapse of any of the World's major currencies, be it the US Dollar, the Yuan, the Yen or the Euro will be absolutely disastrous for the World's economy and will signal the collapse of money itself and is unthinkable or at least I am not willing to even contemplate such an event.
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Some have argued that if we were in the Euro Zone we would be in a better position today by virtue of the very large Euro Zone market.
This however ignores some very important points about the Euro Zone market place. For example, if Euro Zone member A found that the single size fits all interest rate more closely matched the needs of their economy than member B, the chances are that member A will gain economic strength relative to member B, and that member B may find increasing difficulty in competing with member A, both within the Euro Zone and outside the Euro Zone. And Member B would not be able to use monetary policy of changing interest rates or devaluation to rectify the imbalance as they are members of the Eurozone. They will have to use painful domestic fiscal policies like reducing Govt expenditure, wages etc in an attempt to compete successfully.
Ireland's economy has collapsed because of their membership of the Euro Zone. During the boom period, Ireland's economy required much higher interest rates than the one size fits all interest rate decided for the Euro Zone by the ECB, and this fuelled an even bigger credit based and construction boom than we had in the UK. The ECB were not the least concerned that the interest rate was inappropriate and damaging to Ireland because they were too insignicant a part of the euro zone economy for them to worry about. The Irish are paying the penalty today and will be for years to come.
In our case, the economic problems we are facing are all home grown, courtesy of our grossly incompetant Govt who failed completely to manage Govt expenditure, monetary policy and above all credit control in a sensible way.
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#22. busby2 wrote:
"the economic problems we are facing are all home grown"
As one of the 'some' who do not agree with you on the negative economic benefits of a single currency as your contribution outlines:
Let me also add that I believe that you also underestimate the globalisation aspects of the relatively larger destructive effects we have experienced to out economy courtesy of our huge 'advantage' of being mainly reliant on financial services.
The arguments you advance against a single currency might have some merit if you could show that, for example, the adoption of a single currency by the constituent states of the United States of America had been decremental to its economic development. (Please read up the economic history of the USA between 1750 and 1850 first. - Try for example Davies, Glyn. A history of money from ancient times to the present day.)
You are presenting the arguments put forward by the banks and financial services industry to whom we have become in thrall during the last decade and I need not point out where that has got us! Don't let them continue to destroy the country. We must escape their clutches and make things again!
Let me finish by asking you to consider the question that relates to competitive devaluation and protectionism and the role that manipulating the currency has in this.
I also wonder how you sell to the workers that their wages have to be cut by currency devaluation - that (in)famous speech of Harold Wilson comes to mind!
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This Fitch report merely demonstrates one of the major flaws in the Euro and the difference between it and the US dollar.
A major strength of the US dollar is not only does it cover a very large population and a great deal of economic activity but it is also controlled by a Federal administration. The same is not true for the Euro. Whilst the ECB has control over interest rates it has regulations but no real power to control the economic decisions of individual member states. Very soon countries like Ireland Spain, Portugal and Greece will have to take economic decisions that will take them outside of the Euro regulations. The ECB can condem their decisions but it cannot force the individual governments to change them. Therein lies the inherent weakness of the Euro.
Once that does happen, and it will very soon, then the security of the remaining memebers also comes into question. This will lead to a lack of confidence in the currency The significance of this lack of confidence cannot yet be measured.
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Stephanie
Another slant - the UK ugly truths...
If you also consider which european countries are net importers/ exporters and the proportion of a nation's lending that is to countries overseas - agencies can start to get a better risk rating for each country and its currency per the rating agencies. To do this the rating agencies logically need to know the overall foreign cash flows of each major bank/country. How these rating agencies get all the stats together on banks that can't account properly for their own money is a mystery and the specific ratings for each country and country must be rather esoteric.
Britain as not in the euro currency arguably has more flexibility on currency parameters than e.g. Irish Republic but a greater portion of UK GDP is from invisibles than other European countries and we are reported to have higher foreign debt (depending on system of measurement) than the Benelux countries, Italy and Spain.
Britain is more exposed in a global market as the reliance on the financials to underpin the UK economy leaves UK heavily exposed in a global economy. I've just listened to the two economic advisers (lawyers advising on economic issues?) on BBC Newsnight and I was not impressed with G Brown's advisor, at all.
UK is suffering a triple whammy (net importer, massive overseas & long term debt, without a resource backed currency) - all due to labour government's over-reliance on globalisation and all things global. WTO and all other global trade agreements should only apply under certain conditions and we should know when to suspend them - like now.
Relevance
I think in a european context an accurate set of UK ratings will show that Britain not only has to decide now whether to join with the euro currency - but if it does not join - I think Britain will also have to decide whether to stay in the EEC if it does not join the euro and also gets bad ratings as the result may produce a more severe run on the pound and which can bankrupt the country and create the conditions leading us to go begging to the IMF. On that, I think that David Cameron and the Tories are right to voice their concern.
Over-talking 'big', 'global', 'globalisation' is simply complete tosh and deflects from what is really going on. I think that much of our politicians global talk shows a diseased mindset amongst the political elite who dress up basic world trade activity with over-simplified 'global cliches' to camouflage 'mistakes' and 'give-aways' and what is really going on - a lot of the countries who obsessively promote and babble 'globalisation' for the sake of it - are the ones with an underlying troubled political agenda for doing so. Unfortunately, I think that this now includes the UK.
One further thing in a European context - Why is G Brown so keen on globalisation? - This may surprise you, if indeed any one agrees with my views.
I think globalisation suits a certain style of 'talk big' governance which is purely finance/debt driven at the macroeconomic level - it means that the government do not have to actively micro manage other national resources. Its just lazy, bloated, arrogant, inefficient government.
UK governments/both main political parties in the UK find/have found it easier ro raise donations by promoting globalisation for the UK invisible economy - cash for honours, passports, favours, non -doms etc and in G Brown's case - he is not now so heavily reliant on the trade unions for receiving donations to the Labour party.
Mr Brown does not have to develop resource backed innovative industry when he can go to some sort of EEC or global bank or fund and borrow for favoured projects. This has been a major factor, in one form or another, in UK politics for 300 years and as exploited by both the Tory and Labour governments - also Tony Blair particularly, in recent years, brought Labour in line with the Tories on this relationship.
It is this mentality and purpose which has now left the UK exposed and I think this is crucial to the analysis and shows the complex blend of UK politics and economics in a european context. No wonder the German chancellor was so scathing recently about UK plc finances - notwithstanding his domestic partisan position, he could have said a lot more and he understands why Germany is better placed in what is a european recession but which is arguably now a 'depression' for the UK.
Britain is at the 'cross roads' and needs to quantify and grow a sustainable economy and continuing with completely open trade environment will also bankcrupt the UK, as the global economic cycle is out of phase with Britain's individual net exporting capability and borrowing requirement.
If Mr Brown and his advisors properly understand what they are doing - he needs to consider very carefully any further UK trade deficit/debt finance deals since the resultant fallout for the UK will in my view result in either the UK having to go to the IMF for a national bail out or the UK having to consider withdrawal from the EEC/euro in order to intervene more drastically in protecting and growing the sustainable element of the UK economy.
The political funding arguments are different in subtle ways in France, Germany and Italy but do not appear to be influenced in themselves by the attraction of a more UK style globalised national economic model. Their global trade requirements are driven more by trade considerations than politics.
Finally, I think this all means that the rating agencies already think the UK and its governments will continue, after the next general election, to simply muddle through as we are now doing - waiting for the City of London to recover as our main national economic driver AND irrespective of who wins the next UK general election. Especially, since the two main political parties are also competing for the 'middle ground'.
I think this is the underlying political driver 'ugly truth' for the UK as is due to this peculiar complex mix of political motivations in our economic decision making as mired in EEC bureacracy and global trade commitments decided and convoluted by the political establishment - so much for 'free trade' - Ha! Ha!... Ha!
The next UK government needs to separate the understanding sometimes between these conflicting motivations and follow the right course for the UK, in managing the political economy.
Where will Labour and the Tories get the donations they require to stage the next general election and what influence does this really have on their decision making when we know that for the UK - all of the 'big money' is now overseas?
It's ugly allright - everyone talks of UK recovery at the moment but I think that the UK is facing longer stagnation unless radical changes are effected and very soon.
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Here are the gross external debt figures as of Q2 2008 as reported to the world bank (http://www.jedh.org/jedh_dbase.html). All figures are in dollars.
France 5,492,425,000,000
Germany 5,748,837,500,000
Italy 2,776,678,750,000
UK 11,469,870,000,000
USA 13,703,567,000,000
At first sight the UK would appear to have a disproportionately high level of external debt relative to the size of its economy compared to the others. Whilst this is mostly a reflection of the nature of the UK economy which is heavily orientated towards finance there is undoubtedly a possible danger in such exposure. The danger if any depends on a number of factors, notably:
Who has borrowed the money
Where have they borrowed from, in which currency and on what terms
When is repayment due
What are the supporting assets
What is the return of these assets and what currency are they denominated in
Are these assets performing
Clearly with such high levels of international borrowing there is potential currency risk. In addition, the world bank figures seem to indicated that about half the UK debt is due for repayment in the next six months or so. Given the state of world credit markets there must be a question mark over the ability to revolve this level of debt.
The UK government exposure is not clear. According to the ONS UK government debt was 614,400,000,000 GBP at the end of March 2008 and is rising by whatever the annual government deficit is. Note that this is net debt some of which may well be internal borrowings.
I think the time has come for some diligent investigation by our journalists to quantify the exposure and risk we face rather than simply parroting government figures complete with spin.
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#26. rwolff wrote:
about gross external debt figures:
Debt is manageable (i.e. serviceable) IF the incoming cash flow exceeds the outgoing cash flow at all times.
The World bank figures are essentially useless in determining the answer to the question of serviceability in the short run. In the long run over historic periods they are indicative, but as a forecasting tool they are next to useless, as indeed are so many of the datums available.
#25. nautonier wrote:
about UK ugly economic truths:
Your long piece is interesting but cynical and quite downbeat, not to say defeatist. However I do agree with you that there is an underlying conspiracy of silence about the essentially nature of a recovery for the financial services industry and how that will be relied upon to rebuild the UK economy. I want to see a more diverse economy where the whole nation is not sacrificed to the City of London.
I 'believe' that manufacturing MUST recover for the recovery to be widespread and covering the whole Nation, indeed I would go so far as to say that without a recovery in the manufacturing industries there will be no real recovery for the Nation.
But I do use the word 'believe' as I can not produce any 'economic' evidence to say that a renaissance in manufacturing is strictly necessary for an economic recovery. I do believe however that without some structural mechanism to diversify away from financial services any recovery will be very very risky indeed.
I also appeal to the logic that the recent incompetently managed bubble that gave rise to the crash was driven by an overweening reliance on financial services and therefore should be avoided in the future.
You also, I believe, place far too much reliance on ONS figures - the CPI (consumer prices index) nonsense is a 'knife in the heart' of their 'professionalism' and a stain on their reputation that should have been expunged long ago.
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I've been reading this blog for a few days as other blogs seem to be increasingly used by the government for 'spin' purposes.
Unfortunately, it seems this one is the same.
Most posters, here and elsewhere, can see through the spin and indeed are very well informed.
What is said here seems to be another attempt at trying to pull the wool over our eyes.
We are not stupid-we know that the whole picture of national finances is scarily bad. Our national debt to GDP is far too high already, and with the various bailout/debt guarantees being offered, it will increase dramatically in the next few months.
The government should be leading the way in attempting to reduce our debt. When we are unable to repay the loan due in a couple of months, and unable to refinance it, we, as a nation will be bust. Our rating will drop like a stone. We will need the IMF, but I don't think they will have enough to help us.
Give the nation the full truth please. Forewarned is forearmed. Us Brits CAN stand firm, but only if we know all the facts. It's a little patronising to only tell us what the government wants us to hear.
Half truths are more dangerous to the government than the full truth. Tell it like it really is (bad, really bad), or there will be more serious unrest than just angry bloggers!
One other point, Stephanie, please use English spelling, not American please (criticise not criticize). Or change your spell checker! I would expect a UK journalist to know how to spell in English!
Thankyou
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Britain keeping out of the euro gives us trade benefits, when the UK economy is run well. However, at times of economic crisis, sterling is vulnerable because it is not backed by as many reserves as the dollar, euro, yen or yuan.
Hence, the need to manage the British economy along prudent lines, and not take risks based on debt and asset bubbles during the good times.
If one currency falls, another must rise.
The basic free market forces within the world economy try to even up trade imbalances by exchange rate movements.
USD = Weaken due to trade deficit, but still the world's reserve currency; so has actually strengthened because of investor appetite for US Treasuries in times of crisis.
GBP = Weaken due to trade deficit
Yen = Strengthen due to trade surplus, and reversal of carry trade
Yuan = Strengthen due to trade surplus, but this force is mitigated by China buying US Treasuries.
Euro = strengthen due to Germany being world's biggest exporter, but demand is falling for Germany's high value exports and the weakness of other nations within the euro zone will act to weaken the euro
In this set up, sterling is easily the weakest currency. However, it is not easy for Britain to exploit such a weakness because we can't change the set up of our economy overnight.
I feel that exchange rates will hinder the world economy, because they make it harder for exporters to export and importers to import. Each country cannot easily change its set up - how can Britain suddenly compete with Japan or Germany in manufacturing cars, for instance, when world demand for cars is very low.
If China cannot afford to keep buying US Treasuries in the future, the yuan will strengthen and the dollar will fall.
The euro zone's relatively high interest rates will act to keep the euro strong relative to the dollar or sterling.
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Dear all,
Since we are having a discussion on ratings of nations and I made a comment about that in another blog. But this was removed by moderators, becasue it was deemed off topic. I believe it is on topic now.
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Dear all,
thanks for all your kind replies. In regard to the Euro, I can give you the Dutch perspective. In previous downturns we have been subject to havy currency speculation, which hurt the overall economy, importers and exporters alike. Since we are an open economy with long term trade agreements a stable currency is of real importance. The cost to maintain currency stability in previous downturns have been enormous. Now thanks to the Euro it is for free. An additional benefit is that new debt issued by the Dutch government has a low interest, in effect much lower than in previous downturns. Making it easier to repay current investments in for example ten years time.
As for Italy; The devaluation of your currency is not a magic want. It hurt a lot of Italians directly in their wallot, making them poorer over night. That is why they wanted to get into the single currency.
And additionally, although the interest rate over new state debt is marginally higher than Germanies it is markedly lower than in previous downturns. Making it much easier for the Italian government to invest in its economy. And making it easier to repay.
Even Greece is better equiped to fighting this downturn, because the interest rates on state debt are markedly lower than they were in previous crisises. It is just keeping away a risk factor for investors. Espicially other Euro zone investors who can invest in their own currencies in other EU countries, without fearing exchange rate volatility as was the case before.
The Euro has been a fact of life for ten years now. Bringing back the old currency is a logistic operation that will take at least a year and probably two. So from a practicality point of view it is nearly impossible.
And more importantly all internal debt, mortgages and savings are in Euros, and will stay that way even if there is another currency. Because it is issued across borders and cannot be changed by a single government.
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Some addition to that. There are now industries operating in the Euro zone that could not exist in a smaller market. In effect if I buy something for example online the shop regularly sells it in the entire EU for the same price and transport costs. This larger market allows numerous nice markets to develop a large enough market to exist.
The Euro was not popular in the Netherlands due to national sentiment, and probably is not "loved" as much as the old Guilder today. And the same probably accounts for Germany and most other Euro nations. But, now most people see the practical bennifit of having the same currency as the nation you export 80%+ of your exports to.
As for Ireland, that is purely a policy mistake of the government. There are fiscal and regulatory instruments to steer the housing market as well. This is common practise in most countries. The Irish government has been warned on numerous occasions. We have had discussions on Dutch national television on the Irish and Spanish housing bubble for years and on how to prevent such a bubble form occuring. The ugly truth is the Irish and Spanish government benifitted greatly from this bubble and chose to let it exist in the short term and leave another government to deal with the problems when it burst.
And I dont believe the Euro is a burden for them, it rather is a safety net. Becasue currency volitility would have drove all investors away and cause massive devaluation and a price-wage-spiral fueling inflation. The devaluation would easily be more than the 30%+ experienced by the UK right now, because the Irish and Spanish currencies aren't held by others as a reserve currency. Making a difficult situation even worse.
As for the UK joining the Euro. General analysis here is that the UK is more than welcome to join. But they will have to adhere to the stability-pact and show two years of synchroniation just as all other applicants.
Kind regards,
Johan van den Heuvel
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27. At 09:43am on 28 Jan 2009, John_from_Hendon wrote:
#25. nautonier wrote:
about UK ugly economic truths:
'Your long piece is interesting but cynical and quite downbeat, not to say defeatist.'
John
I've commented on or have provided a book load on these blogs about what I and others think can de done for UK plc - families particularly - we are where are - we need to realise how we got here and what the underlying problems are if we are to do the right things and get out of the current situation - the political estblishment need to do a lot more for a balanced sustainable UK economy - the reality has been and still is meglamania, greed, sleaze, inefficiency and missed opportunities.
I have, by the way, never said or intimated the UK is defeated but most are kidding themselves that these conditions will fully right themselves as part of a 'normal' recovery - establishment rhetoric has failed and a paradigm shift in both micro/macro economic understanding is needed here - for government to be effective.
Anyone can express a point of view of how they see things at the moment - state the obvious - the real question is to analyse and state what can be done going forward.
I think that political fat cats of all parties are holding the UK back due to their obsession with the City of London and what it can do for them. Too many with vested interests are also very sensitive to any form of criticism.
What is the UK mindset for our european political economy? The rhetoric from government is slowly changing - but I think that the boat needs rocking a lot more.
We're at the 'cross roads' on Europe - in my humble opinion, of course. Let's ditch EU membership and/or get the stability of it as a leading nation - I can't see as saying this is any way cynical, downbeat and/or defeatist - that's the current establishment mindset (both main political parties) who can do little more than refinance the nation for our granchildren to pay back!
Also, your quote:
'You also, I believe, place far too much reliance on ONS figures - the CPI (consumer prices index)
I've not mentioned any 'ONS figures'? - I deliberately avoid boring people with stats - so I don't understand your reference to this?
Thank you for your comments - I think that we agree on a lot of issues!
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#27 john-from-hendon
I agree with you that the issue is serviceability coupled with access to credit renewal as loans become due. So often headline figures are used to mask or divert attention from the underlying facts and risks.
My plea is for some journalists to lift the lid on this can of worms and expose the true picture. It may even turn out to be less bad than many think. However, I do think that refinancing 5 trillion dollars over the next six months, which is what we appear to be faced with, could be problematic.
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#21 John from Hendon
When the UK joined the Common Market the aims were largely to provide the same benefits that you highlight for the US and China. Since then the poltical agenda of the EU has shifted significantly.
A single currency is only one factor that would allow companies to benefit from greater access to European markets - but it is one that I feel comes with other economic constraints that far outweigh the benefits, not mentioning the political dimension.
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Johan_Heuvel #30
"We have had discussions on Dutch national television on the Irish and Spanish housing bubble for years and on how to prevent such a bubble form occuring. "
The Dutch are fortunate to have this analysis of other European economies. In the present situation the BBC gives us precious little to compare the UK's position with its "competitors". Please Stephanie, can we have some reporting to show us whether the equivalent of Woolworths, RBS, etc are happening in France/Germany etc.
Tigerjayj #28
"One other point, Stephanie, please use English spelling, not American please (criticise not criticize). Or change your spell checker! I would expect a UK journalist to know how to spell in English!"
Oxford (the OED, heard of it?) prefers "criticize", so did The Times until recently. Cambridge and The Guardian prefer "criticise". Neither is American and a good UK English spell checker gives the user the choice.
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Phew! If governments are borrowing 2 trillion euros, no wonder there's no money left for anyone else to borrow.
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#20 ATNotts
Agree that it is good to read comment about the pro's & con's of Euro without all the other issues clouding the points.
I do however think that is the point. Europe will not confine itself to the trade benefits/ problems to be solved. If it did, a mature debate could happen.
As with all people in power/ on the gravy train in EU (as at home), give them a little and they create a lot to continue their empires for selfish ends.
Have a two speed Europe. One for a trade/ finance debate and one for those who want to chuck their lot in with central government. We can pay for our share of the cost of the one we want to be involved with. That alone should help with the UK budget deficit!
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John_of_Hendon wrote in reply to me at post 23:
"The arguments you advance against a single currency might have some merit if you could show that, for example, the adoption of a single currency by the constituent states of the United States of America had been decremental to its economic development. (Please read up the economic history of the USA between 1750 and 1850 first. - Try for example Davies, Glyn. A history of money from ancient times to the present day.)"
Well it was a long time ago but i studied economic histroy at university and my course included American economic history.
Any study of US economic history shows that the South had another 100 years of economic underdevelopment after the Civil War because the single currency helped the Northern states to retain and stengthen their economic and industrial position compared to the South.
The civil war meant that the South was even more starved of capital after 1865. The USA was an economy of two parts with the victorious North in the ascendancy. The South faced decades and decades of lower growth and reliance on agricultural and raw material production whilst the economic strength of the Northern states grew steadily.
In a single currency area, the tendency is for the gap between richer areas and poorer areas to be maintained or to widen. In the North of the USA for example they had the capital, the skilled workforce, better infrastructure and larger markets and thus any new entrepreneur would also want to base his business in the same area.
If you want greater economic development to take place in less developed or depressed areas within an economy, there is a need for regional policy incentives to overcome the economic and cost disadvantages from locating in such an area. This is easier to achieve within a single country like the UK but within a huge single currency area like the Euro Zone, whole countries like Ireland and Greece will find that a single overvalued currency and interest rate fixed at a rate to suit Germany will cause long term harm to their entire economy, not just parts of it.
The relative strength of Germany within the Euro Zone will continue to grow helped by the single currency, whilst weaker economies will find that their relative economic position declines and that their means for rectifying the situation will be limited by their membership of the single currency and their inability to set an interest rate to suit their economic needs.
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#31. nautonier wrote:
"I've not mentioned any 'ONS figures'"
You are correct, I am afraid the paragraph on the ONS was intended for '#26. rwolff:' to whom I address the first part of my response. The paragraph seems to have slipped!
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#37. busby2 wrote:
Talking about a single currency (for the USA)
"..regional policy incentives to overcome the economic and cost disadvantages from locating in such an area to overcome the economic and cost disadvantages from locating in such an area. This is easier to achieve within a single country like the UK.."
Oh indeed, tell that to the Cornish, in fact anybody outside the SE of England. Of course regional disadvantage management is vital and this is widely recognised, however it still does not I think overcome the huge disadvantages of multiple currencies.
The problem with the UK is that the Nation's currency has been and, is run, solely for the benefit of the Financial Services business and the City of London at least the Euro would get rid of this distortion and would help rebalance the Nation's economy.
Returning to the USA - no quite the place here, but consider the position around independence with multiple currencies with huge administrative barriers to trade and the position fifty years after. I think it is also quite important to properly assess the effects of the abolition of slavery and the consequent increases in costs on the nature of production in the South.
In then end the USA is stronger and its currency is stronger by being a united nation with a single currency.
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#38 john-from-hendon
I am intrigued by your criticism of ONS figures. I agree that CPI has been manipulated beyond meaningfulness, as have many of their other figures such as unemployment statistics.
Government borrowing figures are dubious if only because of all the off-balance debt and lack of accruals for future committed costs. As for GDP, it follows that if CPI is in error then the GDP deflator is also wrong. I repeat my plea for some in depth analysis of the true figures. Nonetheless I think it is fair to assume that any figures emanating from HMG will err on the side of painting themselves in as good a light as possible.
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Oooh!
JonChr-aren't you the sarky one!
Yes, I know what OED is-I won't bother you with my qualifications, and as far as spelling is concerned -the s in criticise is how I was taught, and how my children were taught at school, college and university!
The OED is well known for including trend spellings, words and phrases.
Perhaps my version is older than yours.
However, the fact that you feel it necessary to write so eloquently on the subject of the 'z' does make me worry about your use of recreational time! You'll be correcting my use of syntax next!
Anyway, glad to see the BBC have sent at least 2 journalists to Davos-we have a good chance of getting some answers!
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