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Safe haven, for now

Stephanie Flanders | 13:03 UK time, Wednesday, 28 April 2010

"Could it happen here?" That's the question I keep getting asked, as the Greek tragedy in the markets continues to unfold.

I did a fairly comprehensive piece on the differences between Britain and Greece some time ago. But a pocket summary of my conclusions: like Greece we're borrowing a lot at the moment. Like other governments that are borrowing a lot, ours would be vulnerable if international investors decide, overnight, that sovereign debt isn't a safe bet after all. Like then, we also recently won the chance to host the Olympics. But there the similarity ends.

We have four important advantages which Greece lacks.

First, our stock of debt is rising fast, but it's still much lower than in Greece - and many other European countries. The OECD predicts that British government debt will rise to 78% of GDP in 2010. The forecast for Greece is 120%, with an average for the Euro area of 85%. (These are all on the Maastricht definition of gross public debt, which comes out higher than the net debt figure the government tends to use.)

Second, the average maturity of our debt is much higher - at around 13 years. That's the highest of any major economy. It means that, even with our big deficit, the British government is going to be raising less new debt in the markets this year than Germany, France or Italy. It also means that any rise in the cost of borrowing takes a long time to affect the average cost of the debt. (A point I made on Today this morning.)

Third, unlike Greece, we have a good track record of raising - and collecting - taxes when the Treasury needs them. Many voters would say, too good.

Fourth, and, most crucially, we're not in the euro. If push comes to shove, we can always rely on a falling currency to make our debt easier to manage. That is why most investors think it is more or less inconceivable that the British government would actually go into default.

If you don't believe me, ask international investors. The price of British government debt has risen today, only slightly less than Germany's -as the price of Greek debt continues to fall. You wouldn't guess it from the feverish debate here over the deficit, but right now investors think we're a "safe haven".

That may change. We may, after all, have some serious political uncertainty coming down the track. But market movements today are a good reflection of the distance between London and Athens.

Investors may worry a lot more about Britain's public finances than they did a few years ago. But they worry half as much about it as they worry about Greece.

Update 16:00: A bit of show and tell to back up my previous comments on the difference between Britain and Greece. This is what's happened to the interest rate on Greek and British two-year debt since last autumn.

graph showing gilts versus greek bonds(The white line represents the UK and the orange line represents Greece.)

As you can see, Greek debt has had a heart attack. The English patient is alive and well.

Comments

Page 1 of 3

  • Comment number 1.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 2.

    Nice summary Ms Flanders.

    It seems to me that the real issue is the potential emergent and unforeseeable effects on the UK economy of a full-blown euro crisis - which does seem to be on the cards now.

    As an ex-military man, I have learned that in a crisis the first question to ask is, "Who is in charge here?". If there is not a swift and unequivocal answer (naming one individual), the crisis unfolds rapidly into disaster.

    As far as the euro crisis is concerned, Ms Flanders can you tell me please, "Who is in charge?"

  • Comment number 3.

    The treatment of the UK as a safe haven by (some) investors is on a par with the US treasuries being seen as a safe haven.

    When your ship is nearly underwater, the ship which is sinking slower does seem like a safe haven by comparison - but alas, they're all going down and the rush to the sinking ship merely exasperates the sinking by the additional weight.

    In treasury terms this is why the US is in a giant T-bill bubble - as I pointed out previously there has been more invested in the US treasury market in the last year - than in the previous 9 years!

    All bubble eventually burst - the bigger the bubble, the bigger the burst.

    If the UK is viewed as a safe haven, then prepare yourselves for a giant Gilt edged bubble rising from the BoE - a great way to win an election - but an even better way to bring down a nation.

  • Comment number 4.

    For me the interesting comparison is not between the UK and Greece, but between the UK and Germany. They have decided that the Euro is good for them, and are now standing up for it. Why couldn't the UK do the same?

  • Comment number 5.

    This all goes back to the initial decision to bailout the banks. There is only an assumption that this was the correct thing to do. The great "what if" is if that was not done. Let us say the funds were put back into the accounts of those who actually lost value in retirement and investment accounts and the banks took their losses and everybody moved on. The public would have had the money to purchase and maintain the economic activities and the banks would have had to change the way they do business to survive. The wrong decision was made and now the cosequences are being faced by many nations. The banks have shown no remorse and continue with their arrogant ways. The basic premise was that the banks needed to be saved to save the economy. The banks have been saved but not the economy...the very premise failed. This is as much a problem with having large banks that can extort nations as it is about economic policies.

  • Comment number 6.

    Until the Greek government can bring together the different factions in society, which at the moment seem to be at each others' throats, then I can't see them making any progress on a plan let alone actually reducing their deficit. The contrast with Ireland seems to be that there, everyone has at least recognised the problem and accepted that it needs to be dealt with, where as the Greeks still seem to be in denial.

  • Comment number 7.

    With all the promises made by the politicians - new investment, new jobs etc etc on top of dealing with the budget deficit and any additional taxation being in effect a tax on recovery

    all this further money requirement, as things stand, can only be met from further borrowing and so:

    the bond traders are now waiting for the UK coming out for further borrowing and when this happens the bonds will be short term and at a higher yields for a highly indebted country

    So - this is not neutral for the UK - we're in the mix with the PIIGS but not getting a rough ride yet

  • Comment number 8.

    Stephanie - fair enough. But how about some analysis of the risk of the Greek sovereign debt contagion spreading to European banks. Is there not a potential systemic risk here and how might that affect the UK? For eaxample, I've read that UK banks hold around £150 bn of Greek, Portuguese, Spanish and Italian soveriegn debt. The German and French banks each hold at least twice as much. The Spanish banks have a large exposure to Portuguese national debt.

    Is the ECB about to start its own version of QE by going into the bond market?

    Surely these issues are worth some sort of comment? By ignoring these types of issue, in my view your article misleads by omission.

  • Comment number 9.

    Keep dreaming Stephanie . When the hedge funds cowboys start shooting at the pound , we shall see who's safe and who's not . You are forgetting your history here lassie - try googling "Black Wednesday" . And I think that you know better than me these cowboys are far more dangerous than George was .
    I do wonder though what Peston will think of to defend his hedge funds mates when that happens.

  • Comment number 10.

    Another good piece from Stephanie but as with so many BBC posts, it suffers from trying to be too balanced. I know it is obvious that no country's sovereign debt could survive a strike by international investors but the point is made as though it is a real possibility for the U.K..

    It is not. Talk of down grades of Gilts and buyers strikes that have been such a feature of the hysterical reporting of the last few months, is complete nonsense. Ratings agencies desperate for credibility and publicity after the mess they made of derivative ratings are freely available for headline quotes. This usually takes the form of the view of one man.

    For the reasons Stephanie lists but most particularly because of the fact that the UK figures are always honest and because the UK tax stream is totally reliable, talk of default is complete and utter nonsense. The U.K.'s record as a borrower is unmatched.There has never been a default of any UK government or quasi government borrower and I challenge anyone to produce a credible hypothesis of how this could arise.

  • Comment number 11.

    I agree with some of this Stephanie, especially that our debt burden is growing fast. However we have undeclared debts like public sector pensions liabilities and private finance initiatives that push our level of debt near to that of Greece, so our public debt is at a similar level to when we ended the 2nd world war, and private debt is a big burden on the economy too. All this will take generations to pay back, if it ever is which is unlikely. We need to earn our living as a nation by making and doing things locally, not importing more cheap labour and outsourcing jobs, and not relying on economic growth by increasing public and private debt. Less reliance on the City of London casino, build new railways, roads, nuclear power, tidal energy, prepare society and the economy for being less reliant on more expensive oil.

  • Comment number 12.

    Safe haven? - or big double dipper...

    http://www.reuters.com/article/idUSLDE63P0UD20100428

    Could be interesting considering the Tesco boss confidently confirmed "We are out of recession" 2 weeks ago.

    Predictions in crises are always difficult when they are based on 'hope' and 'self interest' rather than fact - don't you think?

  • Comment number 13.

    Dear Stephanie,
    The Euro is a blessing...imagine when the problem reaches UK in lets say
    1-2 years.Imagine a Big Freeze Winter like this one we had recently.Imagine having to buy all this gas we import from Mr Putin
    and Russia using a devalued Pound.Greece would have already defaulted
    without the Euro..

  • Comment number 14.

    The comparison between Greece and the UK is skewed by the essence of time.

    Sure the Greeks are worse off than us, with a bigger deficit and a bigger debt - but that's today - that's why Greece is now paying over 25% on it's 2 year issues.

    However we are on the same track, following the same course they did - they are merely 'ahead' of us on this railroad.

    What Stephanie has also failed to include in her analysis is the overal debt picture, instead choosing to concentrate on the Government debt situation.

    If you look at the following table - you can see that Greek private debt is a mere 78% of GDP, but the UK is a whopping 220%!

    So they are worse off as a Government - but we wipe the floor with our personal debt ratio.

    Once again, the tissue of lies is there to deceive and not to inform.
    http://av.r.ftdata.co.uk/files/2010/02/ScreenShot316-e1265818409657.jpg

    (http://politifi.com/news/Handy-sovereign-risk-table-182270.html)....in case the link is moderated - again!

    What the table clearly shows is that the UK is being bouyed by it's historical credit rating (AAA) - not by any financial fundamentals.

  • Comment number 15.

    #1. writingsonthewall wrote: (quoting Stephanie)

    "Fourth, and, most crucially, we're not in the euro. If push comes to shove, we can always rely on a falling currency to make our debt easier to manage."

    So the bankers make even more money and the purchasing power of the wages of the workers is reduced. Stephanie, even Harold Wilson knew that this remark was bunk when he made it when you were just a little girl. Your father probably made fun of it over supper!

    Do you think that the British education system is even poorer today than it was then (you clearly do as you suggest that devaluation is cost free!)

    Make no mistake being outside the Euro is not a safer position. If the Euro falls then our major export markets may dry up and this will hit us very badly. These glib remarks about how easy devaluation is, are either ill thought through, or display a disregard and disdain for the intelligence of the British people. Which is it?

  • Comment number 16.

    However finance generally, and debt repayment in particular, is quantified, in order of quality, accounting standards traditionally place the USA and Germany "less risky" than France and the UK, and France and the UK less risky than, in increasing order of risk, Italy, Spain, Portugal and Greece.

    It remains to be seen just how risky the USA and Germany have become, albeit for different reasons. Japan has its problems, and although the economy gives China strength, political factors mean it is a gamble. Others - Brazil, India, Russia etc may be the future, but not yet.

    So yes, public AND private finance is worrying indeed, but however bad, not disastrous. To misuse Thatcher's slogan, There Is No Alternative.

  • Comment number 17.

    Ms Flanders I always enjoy your work. However even if the current profile of UK debt is spread over 13 years, what about the ca.£200bn to be funded in this year? Also weaker £ exchange rate is not a 'free' bet. What price will a foreign investor demand for the privilege of relying on the UK state? The recent UK budget would suggest the Treasury is allowing > 5% interest rate and rising! Our ratio of debt to GDP is heading to 100% and halving of the deficit in 4 years still leaves a vast increase in borrowing to be funded. If our weather was better, we would be a 3rd world economy!

  • Comment number 18.

    6. At 1:50pm on 28 Apr 2010, edge540 wrote:

    "The contrast with Ireland seems to be that there, everyone has at least recognised the problem and accepted that it needs to be dealt with, where as the Greeks still seem to be in denial."

    Are you not watching? the Irish self-cutting has made very little difference - although it has ensured that the chances of growth this year are almost 0.

    ...and this is seen as a 'good policy' - me thinks not.

    The Irish have bled themselves and will still be thrown to the wolves - I say the Greeks are in the better position as they have not weakened themselves prior to the inevitable.

  • Comment number 19.

    Stephanie,

    Lot of tosh. We are skint.

    Anyway did you see the PM just shoot himself in the head on national tv. Whoops, he called a life long labour supporter, a pensioner no less in Yorkshire a bigot for daring to ask about the liklihood of taxes increasing on her pension and the national debt.

    Analyse that.

  • Comment number 20.

    8. At 2:00pm on 28 Apr 2010, nedafo2 wrote:

    "Surely these issues are worth some sort of comment? By ignoring these types of issue, in my view your article misleads by omission."

    Oh we don't want the truth - it will make the wallflowers wilt.

    I believe 75% of the 'EU held' Greek debt is held by France - and which country was first to sign up for their part of the bailout?

    Self interest see.

  • Comment number 21.

    Stephanie,

    the one comment I would like to question is your lack of concern on the long date maturity of our debt. What you say is very true; namely that borrowing at higher rates will take time to filter through BUT surely it is ALSO true that any NEW debt we take on will be at higher rates and for long date maturity as well so even when things improve for the UK's deficit and debt, we will still be paying at the higher rates for a LONG time after.

    the numbers are so astronomical for debt repayment £40bn ish that I have difficulty conceiving of them and can only think of all the good that money could do rather than going to the lenders.

  • Comment number 22.

    What Stephanie and indeed WOTW have forgotten is our get out jail (but not free) card.

    Our debt is mostly in sterling. If all else fails govt can simply print more of the stuff to pay off the debt so, unlike Greece which cannot print Euros, there is no danger of UK failing to pay off the debt.

    Of course this is not a free lunch. Printing money runs the risk of hyper inflation (as per Weimar Republic), leads to collapse of currency exchange rate and means all future borrowings will be at a much higher interest rate.

    Stephanie is completely wrong about falling exchange rates making it easier to repay govt debt. As near as makes no difference 100% of govt income is received in sterling. It makes no difference to govt what the exchange rate is. The falling exchange rate helps companies who have income in Euros and dollars but debt in Sterling and it helps UK companies sell more of their goods and services abroad because they appear cheaper (but of course against that raw materials imported from abroad cost more) so there is some, indirect, assistance for govt but that is a minor issue.

  • Comment number 23.

    "Fourth, and, most crucially, we're not in the euro. If push comes to shove, we can always rely on a falling currency to make our debt easier to manage. That is why most investors think it is more or less inconceivable that the British government would actually go into default."

    ======================================================================

    A two edged sword.

    Had we joined the Euro soon after 1997 as Blair wanted fiscal requirements would have prevented the situation we now find ourselves in.

    It did not stop Greece (Eurozone fiscal requirements) but the British tend to play by the rules and as Stephanie points out we have an efficient tax collection system (a bit too efficient for my liking :) )

    German deficit is very low due to discipline. It is not because they have no spending needs; just look at the requirements of the former East Germany. They manage to keep a lid on it.

    Greece on the other hand went on a spending spree encouraged in no small part by banks and other EU countries.

    Perhaps Brown was against Euro membership because he thought it would cramp his style.

    Using a devalueing currency to 'get out of a hole' has nasty side-effects. Best not to get into the hole in the first place.

    Default is on the table if we enter a lost decade like Japan. The only realistic way of reducing the deficit proportion of GDP is growth.

    Deafaults are no longer far fetched for most of the world economies; no longer a preserve of third world states. Japan gets by through very low interest rates; they won't stay low for ever.

  • Comment number 24.

    "We may, after all, have some serious political uncertainty coming down the track"

    The uncertainty of electing a minority government is as nothing compared to the uncertainty surrounding how either party intends to attack the deficit, and the potential for strikes and unrest once they come clean about this. What scares investors is Greeks waving placards and refusing to let their government cut the deficit. Could easily be the UK in six months time.

  • Comment number 25.

    Greece and the UK are not alike. Mr King has proved that any country that can print its own money can negotiate its way round a credit crisis.

    The price to be paid is the devaluation of the currency.
    We can, and likely will, print our way out of our debt problems.

    I am still a firm believer that shortly after the election more quantitative easing will be announced, albeit under the banner ‘to boost the economy’.

    However it could trigger a bigger problem if undertaken without an exit strategy, namely a currency crisis.

    Out of all the potential nightmare scenarios which could ultimately play out, it is a currency crisis, not a debt/deficit crisis that worries me.

  • Comment number 26.

    "Could it happen here?"

    Of course it could happen here if we re-elect New Labour. I heard a piece on the radio this morning about Greece, describing a country in which the government had spent recklessly for several years and had now reached a deficit of 12%. They could have been describing the UK under Gordon Brown.

  • Comment number 27.

    Safe haven, for now…
    Could it happen here?
    Yep.
    Why?
    London is the hub of European activities for Goldman Sachs.
    Prime Minister Gordon Brown called for the FSA to launch an inquiry into Goldman Sachs. So, he must believe "it" could happen here.
    The UK's Financial Services Authority (FSA) announced the formal investigation. The enforcement division of the FSA will have powers to demand that Goldman provide it with documentation such as records of transactions and records of telephone calls.
    $1bn - this is the amount UK and German taxpayers have had to cough up to cover losses on "Abacus 2007-AC1" - the sub-prime mortgage instrument that it’s alleged Goldman sold fraudulently.
    While the £500m loss on Abacus is less than half a per cent of the government's total deficit of £167bn ($255bn) this year, Goldman itself made profits of almost $3.5bn in the first three months of 2010 alone. Something seems not quite right.
    Is Abacus just the tip of the iceberg?
    There were plenty of other CDOs which, like Abacus, were designed to help hedge funds speculate against the market.
    In fact, it was common practice for the investment banks to use CDOs to offload risk they did not want, or to speculate.
    It is unclear exactly how many other cases could follow if the SEC is successful with Abacus.
    There is a gapping flaw at the heart of the entire CDO business. It is OTC trading, non-regulated, the “wild west” of investment trading.
    UK Business Secretary Peter Mandelson said: "We need a system of regulation, a system of levying banks, which is internationally applied." Or at least EU applied.
    Investors including banks, pension funds and local governments lost billions of dollars on complex structured products like the one in the SEC case against Goldman; many are considering legal action.
    German bank IKB said on Monday it was considering action after losing almost all of the $150 million it put into the Goldman mortgage securities product being probed now by the SEC.
    US insurer AIG is considering pursuing Goldman over losses incurred on $6B of insurance deals on mortgage-backed securities.
    The G20 reaffirmed its pledge for central clearing and electronic trading of all standardised contracts and the reporting of all transactions to repositories. This is called as good start to regulation.
    Michel Barnier Elected MEP, President of the French delegation of the EPP, Vice President of the European People's Party has said "We'll tackle the derivatives market in June. To bring light to a very dark world." His reference of course is to the G-20.
    I don’t know exactly how much debt has been removed from UK’s public accounts using instruments like derivative, credit default swaps, CDOs?
    Do you?
    In the answer to this one question, you will be much closer to answer for your original question: Could it happen here?

  • Comment number 28.

    Stephanie: "If you don't believe me, ask international investors."


    Hmmm... well I wouldn't say international investors are offering a resounding vote of confidence at the moment:


    “We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.

    Mr Cailloux added: “This feels like the banking crisis in late 2008 post-Lehman, though it has not yet spread to other asset classes. The ECB will have to act it if does.”

    http://www.telegraph.co.uk/finance/economics/7640783/ECB-may-have-to-turn-to-nuclear-option-to-prevent-Southern-European-debt-collapse.html


    "I believe the 2010s will bring about the close of the Western-centric mindset," he said. "We have now reached a point of no return. In a few years time, who'll remember the G7? We'll remember the E7 – China, India, Brazil, Russia, Mexico, Indonesia and Turkey. These are the ones which will matter."

    Mike Geoghegan, HSBC chief executive, head of Britain's biggest bank, who has now relocated to Hong Kong...

    http://www.telegraph.co.uk/finance/china-business/7640125/HSBC-chief-London-and-New-York-are-yesterdays-news-in-the-new-world-of-finance.html


    The dollar, euro and pound are all unappealing investments, either because of policies of “benign neglect” or concerns on the euro region’s stability, said Stephen King, chief economist at HSBC Holdings Plc.

    “It is a competition between ugly sisters, they are none of them particularly attractive”

    http://www.bloomberg.com/apps/news?pid=20601068&sid=a3xszR0lLUkA

  • Comment number 29.

    We are at the mercy of the ratings agencies.
    Whatever rating they decide to give us, dictates the cost of borrowing for us.

    The ratings agencies are captive to their employers, the banking sector.
    Don't be surprised if they want to see a better spread on what they borrow cheaply to give to us expensively, and our AAA rating drops mysteriously.

    What a failed system............... (mind you, serves us right)

  • Comment number 30.

    Another big difference between Britain and Greece, is that if speculators shorted British bonds in order to make an easy profit, the BoE would be immediately ordered by the Treasury to intervene to stabilise the market, so that the speculators were taught a lesson.

    The position of the newly elected Greek government is being made impossible by the stupid insistence of other eurozone governments that the European Central Bank should not be allowed perform an essential function of a normal central bank.

  • Comment number 31.

    "Fourth, and, most crucially, we're not in the euro. If push comes to shove, we can always rely on a falling currency to make our debt easier to manage."

    Do you really think that will wash Stephanie with anyone but the most naive of read?

    Please explain why a falling pound will be good for the UK.

  • Comment number 32.

    We are no where near on par with Greece, the important difference is here we can collect our taxes. They run a country and try to do it by not collect taxes, obviously it doesn't work!

  • Comment number 33.

    4. At 1:35pm on 28 Apr 2010, Prabo wrote:
    "For me the interesting comparison is not between the UK and Greece, but between the UK and Germany. They have decided that the Euro is good for them, and are now standing up for it. Why couldn't the UK do the same?"

    Does the Euro give camouflage for currency manipulation? The German currency is artificially weak but the pain is felt in other Eurozone areas that are artificially high. Is this right (factually / ethically) ?

  • Comment number 34.

    Let's get real. It's not just Greece, all of the European states are broke. If push came to shove then so is the USA! There is no way out of a continuing series of crisies whilst we hold hard to our broken system of financing in which money (but by that term we really mean debt) rules the roost.

    I totally disagree with Thatcher's TINA maxim - I did then and I do now. We can seek to steady the ship by cutting and cutting until we bleed a la Ireland. Or, we can all sit round a table and arrange a new system based upon some other regulator than money. If we don't want to go down the road of growing social unrest (not just in the UK) and a growing risk of war then this exercise needs to be undertaken immediately. There has to be some agreed form of debt forgiveness. There has to be a new way of ranking national value based upon corporate and social wealth and stability.

    Who would be the losers in such an arrangement? As far as I can tell, only the global financial institutions and global financiers who have become bloated over the last 20 years.

  • Comment number 35.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 36.

    10. At 2:04pm on 28 Apr 2010, Colin Grant wrote:

    "For the reasons Stephanie lists but most particularly because of the fact that the UK figures are always honest and because the UK tax stream is totally reliable, talk of default is complete and utter nonsense. The U.K.'s record as a borrower is unmatched.There has never been a default of any UK government or quasi government borrower and I challenge anyone to produce a credible hypothesis of how this could arise. "

    Past performance is not a reflection of future performance - what goes for investment, goes for Government debt credibility.

    Here's a hypothesis.....read the history of Japan and how it all worked out with it's "zombie banks" and how it's deficit and debt now currently sit at number 1 in the world.

    In the 80's - talk of a Japanese decline would be laughed at - now it's a reality. The same attitude to which you are applying to UK sovereign debt now.

    As for the UK tax stream being 'reliable' - again you have not seen the level of taxation being proposed. Didn't I hear Billy Bragg starting up a tax revolt recently - and at the moment this is just the opening gambit as the real taxes haven't started yet.

    The US is planning a tax revolt too - to go along with ther AAA status and their historically reliable tax stream.

    By the end of this year, you will regret the bravado you have displayed here...

  • Comment number 37.

    Oh OK lets play the BBC game and ask international investors.

    http://www.zerohedge.com/article/red-lights-flashing-uk-credit-spreads-according-cds-market

    Looks like they don´t believe the BBC. Not too hard really is it.

    However if we adopt and Orwellian mindset and ignore international investors and continue to believe that Johnny Foreigner has a higher default propensity than the United Kingdumb then why should sterling fall against the currencies of the foreign defaulters? Or do the British just issue an edict? Oh hey there is an election going on - just vote King Canute and all problems wil be resolved.

    Something is seriously wrong when some guy calling himself writingsonthewall can offer a far more serious and rational insight as to what is going on than the BBC.


  • Comment number 38.

    13.barabou wrote: Dear Stephanie,
    The Euro is a blessing...


    No it is not. It has depressed wages and increased prices. And now its threatening our private pensions.

    mvr512 (the Netherlands)

  • Comment number 39.

    22. At 2:40pm on 28 Apr 2010, Justin150 wrote:

    "What Stephanie and indeed WOTW have forgotten is our get out jail (but not free) card."

    Oh it's not forgotten, however in your picture of a world where companies benefit with their Euro savings and sterling debts - you leave out the part where we are a mainly import dependant society.

    The inflation triggered by rising imports - and of course the biggest of them all - oil - will make the situation worse, not better.

    In the olden days your theory (and it seems the Governments) would have worked a treat, a quick devalue, competitive imports, a surplus in the BoP and wahey - we're back in the game - deficit reduced.

    Sadly those days are long gone - and an attempt to repeat the trick will result in a lot of egg on a lot of faces as we slowly realise that the price of imported oil underpins everything in our Economy.

    ....if only we had access to an oil field, maybe just off the coast of Scotland....but I think that was 'sold' in order to 'improve the deficit' by a previous crisis hit Government.

    Which proves that actions taken for short term gain - always return with long term pain.

  • Comment number 40.

    “We are good at collecting Taxes” - We might have been but if the tank is empty...
    I have just been looking at the Q3 2009 figures, the latest I can get hold of in the library : Though the Government gallantly increased it's Debt by £88,300 Million in the First nine Months of the year, because Households reduced their debt by £435,300 Million and Foreigners Reduced their Debt by £209,100 Million, there was an overall reduction in Debt outside the Corporate World of £556,100 Million. The figures for Corporate Fixed Assets are not known to me yet but if Business didn't have much of Fixed Asset Building party this year - which seems reasonable given all the 'For Let' signs outside empty office blocks all over the place - then the Corporate World is looking at a staggering half a £ Trillion loss this year : This is derived from the Sisyphus Equation shown on the NEFS site "Profit = Fixed Assets + Debt".
    Business only had £122,200 Net Retained Profit coming into the year at the start of 2009, so overall they look pretty bust and an overall pretty bust Corporate World tends to claim back taxes rather than pay them. I can't see anyway out of this while we still use an out of date Financial system that's just "musical chairs" with numbers - Company Profits (Hurray) = Consumer Debt (Boo !). It's daft. I suggest we use NEFS - 'Net Export Financial Simulation' instead !

  • Comment number 41.

    24. At 2:53pm on 28 Apr 2010, Chris B wrote:

    "The uncertainty of electing a minority government is as nothing compared to the uncertainty surrounding how either party intends to attack the deficit, and the potential for strikes and unrest once they come clean about this. What scares investors is Greeks waving placards and refusing to let their government cut the deficit. Could easily be the UK in six months time."

    Oh this is so true - it's not the noises of Governments that sways the markets, it's the actions of it's people.
    Markets don't like citizens who don't bend over and take it when the cuts come - I mean people, always banging on about freedom and all that.

    Not to worry, the markets will expect the Governments to inflict authoritarian measures in order to ensure 'tax collection stays high'.

    This is why writingsonthewall will quit his job and sit around doing nothing rather than contribute a penny to the banking bailout.

    The bill comes round after the meal, the banker passes to minister, the minister passes to citizen, the citizen walks off without paying and the police (IMF) are called to sort the matter out.

    Lets hope it doesn't end in a punch up.

  • Comment number 42.

    some observations:

    the uk has massive private sector debts. as we all know, private sector debts quickly become public sector in a financial crisis due to bank bailouts, etc. uk also hides a lot of its borrowing via pfi/ppp. when you include the private sector, our debt/gdp is around 450%. the importance of including the private sector (particularly banking sector liabilities) in understanding the real state of public finances is a point that willem buiter has been harping on about since 2008.

    greece has a two-party system like the uk - no hung parliaments in greece. germany on the other hand always has hung parliaments. so clearly hung parliaments have very little to do with a country's ability to manage its finances.

    greece has a big credibility problem with the markets, because it has come to light that the government was fiddling its deficit figures for years in order to qualify for the eurozone.

    the main advantage of having our own currency is inflation. if we slash interest rates, print money and devalue, it stokes up inflation, and this erodes the real value of debt. remember, what matters is the ratio of debt to NOMINAL gdp. inflation does not increase the amount of debt we have to repay, but it does increase our nominal gdp (and therefore the amount of tax revenue the government can use to service its debts). i am not advocating inflation at all - the cost of dealing with excessive inflation can be worse than dealing with the deficit. but there is a real risk that if we cut our deficit too early and push the economy back into recession, this could actually make our debt dynamics worse.

  • Comment number 43.

    Is this so called expert for real, I have never read such rubbish about a subject matter that I have been dealing with for last 30 years.

    Other than stating the obvious, most was paraphrased from the financial press. In reality, the UK really does have a potential problem that could end up as bad as Greece..........believe me, it does not take very much to tip over the top. And Britain has all the right ingredients for others to take advantage of when the time is right.

  • Comment number 44.

    26. At 3:03pm on 28 Apr 2010, jobsagoodin wrote:

    "Of course it could happen here if we re-elect New Labour. I heard a piece on the radio this morning about Greece, describing a country in which the government had spent recklessly for several years and had now reached a deficit of 12%. They could have been describing the UK under Gordon Brown."

    Any opportunity eh?

    Did you forget that our 'reckless public spending' was less than 40% of GDP - until the banks ballooned it?

    ....or has someone ripped out the pages in your history book before 2007?

  • Comment number 45.


    Writingsonthewall...

    Yes, true, the point I was making is that at least the Irish recognise that there is a problem - whether their solution is the best is another matter but you get the impression of them all being in it together and the government attempting some kind of solution.

    The Greeks haven't weakened themselves you say - hmmm, well...

  • Comment number 46.

    SF: "As you can see, Greek debt has had a heart attack. The English patient is alive and well. "

    Excellent news! Lets all have even more Lard for tea!

  • Comment number 47.

    29. At 3:17pm on 28 Apr 2010, allmyfault wrote:
    We are at the mercy of the ratings agencies.
    Whatever rating they decide to give us, dictates the cost of borrowing for us.

    The ratings agencies are captive to their employers, the banking sector.
    Don't be surprised if they want to see a better spread on what they borrow cheaply to give to us expensively, and our AAA rating drops mysteriously.

    What a failed system............... (mind you, serves us right)
    ================================

    This is not correct. The ratings agencies are not employees of the banks. They are independent companies who analyse the accounts of companies and nations to determine the risk of them defaulting on their debt payments. There criteria for adopting a rating is quite strict. They don't wake up one morning and think "I know, Greece looks a bit dodgy, we'll downrate them." The higher the risk of default then the higher interest rate the borrower needs to pay to compensate the investor for taking on that extra risk. If you were lending money to somebody, wouldn't you want to know how likely it is that you'll get your money back?

  • Comment number 48.

    At least in the UK you still have some viable industries left (although manufacturing has declined).
    Here in Greece apart from tourism, shipping and agriculture we have almost nothing. Unless we reform our public sector and manage a major "re-branding" (which will take very long even with a good strategy) I cannot see a way out of this mess.

  • Comment number 49.

    I have read some daft comments on here from time to time. But, really, the idea that the UK government ought NOT to have bailed out the banks is probably the most ludicrous.

    Whatever it may now mean for the public purse, the UK would have faced commercial and economic armageddon without that bailout. Any cuts in the next few years would have been as nothing compared to what could have happened.

    Like them or not, your government did the right thing.






  • Comment number 50.

    THE DIFFERENCE IS IN THE ELECTION RESULTS, AND WHAT HAPPENS AFTER. tHERE WILL BE HARD DECISIONS WHICH NEED A STRONG GOVERNMENT ANY HUNG PARLIEMENT COULD CAUSE A REAL RUN ON POUND AND RISE ON INTEREST RATES WHICH COULD MAKE THE DEBT PAYMENTS UNSUBSTANIABLE

  • Comment number 51.

    writingsonthewall 44

    'Any opportunity eh?'

    Yep, any opportunity to tell the truth and I'll take it. Thanks for giving me another. 10 years of reckless spending by Gordon Brown, that's the reason we're in such a mess. If the blame lies with the banks, perhaps you could explain why other countries have fared so much better ? (Greece excepted).

  • Comment number 52.

    Update with graph...As you can see, Greek debt has had a heart attack. The English patient is alive and well.

    Surprised you don't get it Stephanie. Your graph is extremely worrying, as the UK line is neck and neck with the Greek line up until only last November. Instead of taking comfort, this graph shows how quickly a seemingly stable situation can get out of hand.

    You are also muddying the water by stating that our long term bonds mean that we need to raise less debt than Germany, who have alot of maturing debt to refinance. You know that the German pension funds will just buy new bonds out of the money received from the matured bonds. It is the FRESH debt that is really the big issue we face and Germany doesn't, because of our out of control deficit.



  • Comment number 53.

    This is an informative comparison between Greece and UK debt. One point that caught my attention which I think a hidden positive for Greece is its current inability to tax equitably and effectively. Consider taxation has many similarities with symbiotic parasitism in that the parasite (taxing entity) walks a fine line needing to make determinations on who and how much to tax without destroying its hosts (taxed class) ability to create wealth. Britain beginning with the Doomsday Book has evolved a highly sophisticated capability while Greece has not - not yet.
    It is my belief that once Greece develops this ability to “see” taxable economic activity then tax revenues be much higher than anyone can imagine. Recall how dynamic the Greeks are in entrepreneurial skills and the number of small businesses that exist where cash is king (taxation black hole). I think we will see that Greece has large untapped reservoirs of taxable classes that will become available to the Greek state which is encouraging for the long term economic prosperity for Greece and the by extension the UE, IMF and the world as they weigh up the merits of aiding Greece out of this crisis.

  • Comment number 54.

    #49 The Midland 20 Consider this:

    The banking system is irredeemably insolvent. In other words the quantum of debt is so great that it cannot be paid back. Why was it appropriate to bail out the creditors and not the debtors?

    Unless and until there is a debt jubilee the system cannot be stabilized. Bailing out creditors merely adds to system instability. You are witnessing this right now as a corporate debt crisis morphs into a sovereign debt crisis.

    Even if you cut public sector spending to zero you cannot repay the debt. We are still at the beginning, but fear not (or fear a lot) for the commercial and economic armageddon you are so keen to avoid has been fully guaranteed by those who chose to bail out creditors.

    What you have witnessed is the greatest forced transfer of wealth in the history of human society. There will be consequences.

  • Comment number 55.

    #47 suchan104. You should try reading something beyond the marketing blurb of the main ratings agencies. Those agencies are as independent of banks and giant corporates as Iraq is independent from the US.

    How else do you explain the AAA ratings for all manner of junk?

  • Comment number 56.

    Crisis ?

    Ohhh you mean the same sort of crisis where we (the tax payers) saved the Banks and then got ZERO % on our savings and (unless you were one of those jammy so and so's) got fixed mortgage rates only slightly lower than in the boom years ?

    The same sort of crisis where our leadership mortgaged our old ages and the next generation without a whimper from us, only to see the very institutions we SAVED make $Billions profit 12 months later and tell us its because they were CLEVERER than anyone else?

    You know what, I will say it again - WE DESERVE IT.

    Anyone who cared should have been out in the streets protesting against what was going on.

    So what will happen with Greece ? I suspect the following

    1. The IMF will rescue them
    2. Greece will stay in the Euro
    3. Any investor stupid enough to be exposed now will lose everything
    4. The Banks we saved not long ago will make £Billions out of the bond market chaos and volatility that will follow. I did name one of those banks not long ago, but it didn't get past the moderators. I thin you all know the one I mean... "Giant Vampire Squid Wrapped Around The Face Of Humanity" ?
    5. We won't see any of those £billions profit the banks will make. Our savings won't get a penny more of interest and the Banks will still be borrowing from us at 0.5 % and lending to us at 10%.

    But of course thats OK. The biggest heist from the taxpayer in human history is continuing apace and we just shrug our collective shoulders and say "Oh well...."

    We get what we deserve I'm afraid.

  • Comment number 57.

    Stephanie,

    Your analysis settles the UK-Greece scaremongering. But that doesn't mean we are out of the woods. The £ can enjoy safe haven status for good and bad reasons. If and when the hedge funds start a run on the £ it won't be all that different to when George Soros led the charge.

    Yes, we should be OK for a while after the election before the bond markets want assurances on fiscal tightening and assurances we are no longer living beyond our means. That will mean tax increases and spending cuts.

    Before we get lulled into a forced sense of security let's see what the politicians can propose when the new Government takes office - and how much reality our electorate are willing to swallow. So far the debates have been great entertainment - but as far from reality TV as you can get.

  • Comment number 58.

    #51 jobsagoodin. You bemoan Brown and yet are so keen to copy his dissembling style. What specific countries do you have in mind? You can go through a list of nations from Afghanistan to Zimbabwe and you won´t find many that are "doing so much better" than the United Kingdumb.

    Those that are will all tend to have relatively small populations, and large amounts of natural resources relative to population.

    You are looking at global meltdown with international banks and finance acting as the catalyst. Brown and the political classes in general are all irrelevant. Their function is merely to provide a diversion, to keep the unwashed masses from actually understanding just what is going on.

  • Comment number 59.

    So...Spain has just been downgraded by the Ratings Agencies.

    http://www.forexlive.com/102822/all/sp-downgrades-spain-to-aa

    Pretty much perfect timing, as it serves to divert attention away from Goldman and their tribulations before the Senate.

  • Comment number 60.

    I hope the Greek government decides to default.

    Look at it this way, in chronological order:

    1) The finance sector grew out of control, creating debt all over the place and investing it in new, strange derivatives
    2) Finance sector institutions considered to be critical to society, such as banks and insurance companies, started to sink as the value of their investments vanished as the debt mountain unravelled
    3) The governments decided to save those particular institutions, by clearning their balance sheets using the promise of future taxpayer money (QE, etc)
    4) The finance sector, bailed out by governments, begins to speculate on Greek default, investing in short positions and driving up the cost of credit to Greece

    The financiers cannot have it both ways. They either acknowledge that they owe their existence to governments or they should be shut down. Speculators must be prevented from profiting by forcing the destruction of governments, if they owe their existence to governments.

  • Comment number 61.

    #47 Suchan104

    The act of signalling a 'junk' status is as much descriptive as prescriptive. They are well aware of that. They just need to tread a fine line so that just enough credibility is maintained to stay in business. It's another feedback loop in the overall ponzi scheme of things.

  • Comment number 62.

    Stephanie - all is not rosey with the UK. Take a look at the BBC NI web site where a property accumulator was able to borrow seven times his income and is not able to meet his obligations.
    When interest rates rise, more problems will occur with borrowers not able to meet their obligations and this will lead to more bad debts.
    Low interest rates are hiding a problem.

  • Comment number 63.

    133. At 10:25pm on 27 Apr 2010, truths33k3r wrote:

    Thanks for your comments.

    There isn’t a 3rd way. There are many ways.

    We will continue to develop and improve. As many have noted, our democracy has faults but it is better than it was 100 years and that was better than it was 100 years before that. Similarly, our financial systems will improve as we understand the faults of our present one and move onto a better one. That will only happen if someone first of all imagines the alternative and then convinces others.

    We find it difficult to imagine a Tesco till worker and a surgeon being paid the same because it has not happened in our lifetime. We presume that that is the way things must be. Also, we have been taught to value money over everything else so we judge things in terms of money. We don’t feel it is right for the till worker and surgeon to be paid the same because our measuring stick is always money. Actually, money is just a tool, a means to an end and that end is pleasure in its widest sense. We should see money for what it is and control it rather than it controlling us as it is doing at present.

    We don’t think we are in a totalitarian state because the government says that all children must go to school. We might have done so initially. We don’t think it is a totalitarian state because the government says all vehicles on the road must be inured. We might have done so initially. Why would people being paid the same mean that it must be a totalitarian state.?

    If it was possible for everyone to be paid the same and for everyone to have the same freedoms as now would you accept it?

    If everyone else accepted being paid the same would you?

    If Tesco decided to pay all their till workers the same as surgeons are paid, would you accept that?

  • Comment number 64.

    Presumably the emphasis on tourism and shipping in the Greek economy, both of which have been affected by economic downturn in Europe and further afield, and the (reported) flight of rich folks and their portable cash/ valuables, some of them/ it to London, will have its effect on the difference between being in Britain and Greece.

  • Comment number 65.

    The essence of any good system is founded on stability,predictability,resilience and integrity,all sadly lacking in the current situation. It could well be that we are at the beginning of the end of the financial system that has prevailed since the invention of sovereign debt which, together with the collapse in trust in the banking system in general, means that the pressure is on to find something better.It would seem however that all the effort and energy is going in to finding something to patch up the failed system rather than concentration on inventing the new. This can and probably will drag on for sometime yet before the penny finally drops. The risk is that social unrest intervenes to derail clear thinking and action in the interim.Starting at the basic level would seem like a good start point, with a clear model of what the economic function of the individual should be in the new global order. Getting the debate and ideas flowing now would see like a good idea before the runway runs out.As I have said before on several occasions more brain power needed - our current leaders do not seem to have it.

  • Comment number 66.

    In answer to the ex-military man's question "Who's In Charge?", it clearly isn't Ms Merkel, Mr Sarkosy, Mr Rumpouy or their satraps at the ECB or IMF. So, if the generals and colonels have quit the field for a conference, the sergeants, corporals and private soldiers will just have to fight it out as they usually do: unlead, unfed and probably shedding a lot of blood.

    Ms M has been waiting for the election result in Rheinland-Westphalia (09/05/2010) because the German electorate don't want to cough up 8bn Euros and it's all come too early for her.

    It would not surprise me if Greece went to Russia and did a cash deal in exchange for influence in the Balkans, and maybe some gas and/or oil thrown in. Greece could become a variation on the theme of Ukraine. Maybe Turkey will provide the pipelines as payback for its exclusion from EU.

    You watch Merkel, Sarkosy, Rumpouy, not to mention Obama, UKPM and the various outdated, Western financial institutions of the Cold War, relics of Bretton Woods, make one last heave and cough up 50bn Euros overnight.

  • Comment number 67.

    Stephanie, please explain are the rating agencies which have just trashed Greece the same ones that gave US CDOs full of heavily disguised toxic mortgages an AAA rating just a short time ago?

  • Comment number 68.

    As a regaular visitor and property owner in Portugal a key issue is the realtuve buying power of the Euro. In the days of the escudo and early period of the Euro, Portuagl and Greece were good value vacation destinations...now no longer sadly. The Brits who can afford to go there pile into the hyermarkets on the fisrt day, stock up and are not to be seen in the bars ansd tavernas. There has got to be a mechanism for allowing the weaker eurozone economies to float down somehow without the stigma and disaseter scenario of having to pull out or be kicked out of the Euro. Hard to see how this can continue.

  • Comment number 69.

    55. At 6:34pm on 28 Apr 2010, armagediontimes wrote:
    #47 suchan104. You should try reading something beyond the marketing blurb of the main ratings agencies. Those agencies are as independent of banks and giant corporates as Iraq is independent from the US.

    How else do you explain the AAA ratings for all manner of junk?
    ================================
    As somebody who has trained in financial analysis I really don't need to read the marketing blurb of the rating agencies to know how ratings are determined. I notice you don't give any examples of AAA ratings for all manner of junk - a statement which only goes to prove that you know very little about how the ratings are arrived at. As usual you are one of the people who wants to blame the Greek's profligate spending, accounting inconsistencies and inability to stop spending beyond their means on rating agencies, banks, bond traders and everybody else. The problem lies with Greek politicians' inability to tell the truth about the state of their finances (until now) and to cut their budget deficit. Presumably if you overspend on your credit card it's the fault of the bank?

  • Comment number 70.

    So, if the government used tax payers money to bail out banks to the tune of billions of pounds why don't we simply recover it by NOT giving the thieving dogs any more of our hard earned folding stuff. If everyone, yes everyone, in the UK simply stopped paying their mortgage, loans and credit cards what could they do to us - nothing. The legislative process and the under resourced banks wouldn't cope with the administrative nightmare the fallout produced. And wouldn't it be satisfying to be part of bankers woes, the markets would crumble, they don't like public unrest, they like nice stable do as you're told populations. Mass UK unrest would be a major destabilising event in Disney.....sorry...market world.

    Won't the banks collude and keep everyone's salary I hear you cry, well yes maybe they will but it wouldn't be long before government emergency intervention, maybe peoples banking or forcing the banks to release your income - after all our economy has only one form of growth - consumer spending. Worst case scenario banking collapse, you won't need any money, there will be nothing to buy but I would expect some form of governement intervention along with a few stern "Naughty people pay your debts" lectures before it got to this stage.

    OK, plenty of flaws in this effort at mass non-violent revolt but its a start surely! The power is in the hands of the people, it always has been and always will be, unfortunately they are too weak willed, disorganised and frightened to use it.

  • Comment number 71.

    The european sovereign debt domino effect is starting and this will impact on UK.

    1 - Just because we have always paid our way is irrelevant as we have not been asked to justify our credit rating in the sort of derivative fueled over indebted casino era we find ourselves in now. See point 2.

    2 - If credit ratings were so meaningful, why was sub prime mortgage AAA? Credit ratings are past performance related and also inadequate in conditions of point one. Now see point one. Rinse repeat.

    UK tax payers, the ones who have a job, wont be able to earn enough to pay the piper when the UK govt is called to justify our credit rating - and fail.

    This is not a good time to be participating in the ponzi scheme. Brown would do well to lose the election and retire to Rochdale in his hair shirt - an easier ride than dealing with what is coming.

  • Comment number 72.

    As an institutional investor I know a little about this(!), and i can assure you that things are not good.

    While not disasterous yet, the UK situation can easily spiral out of control despite the low CDS. A hung parliament heightens the probability of the debt spiral mounting.

    What is needed is a firm single party government witth a CREDIBLE plan to tackle the hideous structural deficit Labour has left for the next Govermenent. HAlf measures will not be tolerated by the market!!


    As Bill Clinton famously quipped - in his next life he'd like to come back as the Bond Market! thats where the power rests

  • Comment number 73.

    I see that my challenge has not been met despite the rather extreme sentiments expressed by many here.

    I ask again can any of you Cassandras set out the circumstances in which the UK defaults?( I think we should avoid attacks by aliens )

  • Comment number 74.

    I bet Bill Clinton did not mean coming back as a Greek bond market!

  • Comment number 75.

    Colin Grant:

    Begin a serious attempt to down-size and regulate the major banks...as we know those boys play hard and as they have taken down a world economy, placing the UK in default would not be very difficult for them and their gang of thieves.

  • Comment number 76.

    Since the banks are so good at assigning risk this would mean that the financial collapse was a criminal conspiracy as they surely understood the risk posed by the instrutments they so cleverly devised.

  • Comment number 77.

    It is not that government debt is 78% of GDP that is important, but the rate at which it is rising. A possible double dip recession will not help this, nor the huge volume of unfunded [mostly civil service] pension liabilities which are coming due.

    It is not who wins the election which is important, but that there is a winner. Someone is going to have to wind back the [relatively unproductive] government sector from something over 50% of the economy to nearer the 38% when the Labour party took over 13 years ago. This will be painful.

    Thank goodness I don't live in Europe.

  • Comment number 78.

    The UK has been to the IMF before in 1976 under Harold Wilson and Dennis Healey. That time it was 2.3bn pounds sterling. This next time it will be bigger. The UK is now used to this form of global embarrassment. What is worrying is what happens when the IMF goes broke? As for investors thinking the UK is a safe haven, I think it is more like the best of a bad situation, for the time being. Money moves around the world so fast today that sentiment can change overnight and acted upon almost immediately.

  • Comment number 79.

    There's been lots of talk about the AAA rating of each nation which looks very weak everywhere. Although the UK is not in the Euro Zone, this is no time for complacency. It took the UK the best part of sixty years to repay the US lease/lend bill following WW2. The current national debt is so huge it cannot be redeemed. It almost seems worthwhile to allow every EC nation to fail financially, effectively cancelling out all debt. The UK may have been granted its AAA status; only the suffix RRGGHH! has been omitted.

  • Comment number 80.

    #69 suchan104. You can blame the common (Greek) man all you want, but it does not make them responsible.

    Ratings Agencies are fully captured and no-one can credibly argue otherwise. I have obtained ratings on some quite specific junk, it is (or was) easy.

    I am not your research assistant, so look up some of the ratings ascribed to US Sub prime mortgage bonds. Look up when the Agencies removed the Investment Grade rating from Enron and ask whether that was before or after Kynikos had effectively exposed that business as the fraud that it was.

    Ask why the Agencies have moved against Greece, Portugal and Spain this week, and not last week or next week.

    Sure Greek politicians are culpable (like the Ratings agencies they are also captured). However Greek politicians would not have been able to get in so deep had they not been aided and abetted by Wall Streets finest. If you know so much about finance tell me what kind of finance system allows Italy to enter into a swap agreement at LIBOR Minus 17%. Is this normal business? Why would anyone enter into such arrangements?

    If I lend someone money to someone who I know does not have the ability to repay, then who is the idiot in the game, and which party should eat the losses?

  • Comment number 81.

    #73 Colin Grant. Why are you so obsessed with default? Sure your can prevent a default, just like you can prevent any deaths from cancer - just execute the patient. It is easy, but it is not sensible.

  • Comment number 82.

    @ Colin Grant - it isn't a case of default or everything is okay.

    There is a whole host of difficulties the UK could and will face without necessarily reaching the point of default. We are heading in thatr direction, but may not reach that destination. Plentty of stops along the way to worry about though.

    Is it possible that the UK could default? Of course it is. Only a fool would rule it out completely. Is it likely? No. Does that mean all is well and good? Again, only a fool . . .

  • Comment number 83.

    "It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."
    Charles Dickens, A Tale of Two Cities


    If that doesn't sum up our present predicament then I don't know what does.

    It also says to me that we - and by that I mean the whole of Europe if not all of the Western economies - need to totally rethink how we manage and finance our economies. Playing 'the game' by the present rules can only lead to greater and greater problems.

  • Comment number 84.

    p.s. What about California's potential default?

    I read that the California GO bonds and the related CDS are selling equally well! (That is the same organisations who sell the public debt are making a roaring trade in the related default swap!)

    California (although a much larger economy, with a much larger population) is in the same cleft stick that is crimping Greece's style.

  • Comment number 85.

    69. At 8:43pm on 28 Apr 2010, suchan104 wrote a reasoned argument to the Doom laden prophesies of WOTW.

    I say he shouldn't bother. Here is a summary of the wisdom and unearthly insight of WOTW today:

    58. At 7:13pm on 28 Apr 2010, armagediontimes wrote: You are looking at global meltdown with international banks and finance acting as the catalyst. …. political classes in general are all irrelevant. Their function is merely to provide a diversion, to keep the unwashed masses from actually understanding just what is going on.
    54. At 6:23pm on 28 Apr 2010, armagediontimes wrote:
    The banking system is irredeemably insolvent. In other words the quantum of debt is so great that it cannot be paid back. …………Unless and until there is a debt jubilee the system cannot be stabilized……... You are witnessing this right now as a corporate debt crisis morphs into a sovereign debt crisis……….. We are still at the beginning, but fear not (or fear a lot) for the commercial and economic armageddon you are so keen to avoid has been fully guaranteed by those who chose to bail out creditors……….What you have witnessed is the greatest forced transfer of wealth in the history of human society. There will be consequences.
    37. At 4:05pm on 28 Apr 2010, armagediontimes wrote:…………However if we adopt and Orwellian mindset and ignore international investors ……….Something is seriously wrong when some guy calling himself writingsonthewall can offer a far more serious and rational insight as to what is going on than the BBC.
    3. At 1:32pm on 28 Apr 2010, writingsonthewall wrote: The treatment of the UK as a safe haven by (some) investors is on a par with the US treasuries being seen as a safe haven.………….When your ship is nearly underwater, the ship which is sinking slower does seem like a safe haven by comparison - but alas, they're all going down and the rush to the sinking ship merely exasperates the sinking by the additional weight………….The UK is viewed as a safe haven, then prepare yourselves for a giant Gilt edged bubble rising from the BoE - a great way to win an election - but an even better way to bring down a nation.

    BLIMEY WE ARE ALL DOOMED except China, Brazil, Russia, India. Korea, Canada, Norway and a few other countries outside of the Eurozone!

  • Comment number 86.

    Your reassurances on first reading sound quite plausible, but as other posters have noted, it's a bit like someone on the bridge of the Titanic seeing a few other ships steaming into the icebergs and reassuring the passengers, this ship's unsinkable. It wasn't true in the north Atlantic in 1912, and it won't be true for the UK ship of state a century later, not the SS USA either.

    The principles around borrowing and credit are supposedly that if you can borrow capital now, you can invest it in industry and innovation, increase the effectiveness and value of the endeavour, and the growth of the economy, and repay the borrowings on the back of this growth. And, despite some unpleasant hiatuses, such as two world wars and other mischief and mayhem, this principle has done well in the last two hundred and fifty years of the industrial revolution.

    But what if this principle won't work any longer? My thesis is that we are now approaching the Club of Rome's limits to growth. The surging raw material prices up to mid-2008 was a harbinger of this. Some was speculative, certainly, but there was an underlying reality that raw materials would, if growth had continued, been severely constrained by supply. Not only that, but many other natural systems are at, or beyond, their capacity to continue to supply our needs even at present levels of economic activity, the global warming crisis is just the most obvious of these.

    It was this reality that punctured the bubble, more fundamentally than any banking shenanigans, but this has not been noted or acknowledged by the vast majority of politicians, economists and media commentators. And here is the problem, if the world economy is going to be constrained by such a fundamental matter as the availability of resources, and oil is the most immediate threat, then there there will be no growth to repay our debt.

    So I cannot be sanguine about the UK debt, or the USA or indeed any other country's. Indeed I confidently predict that the world economy is going into a serious downward spiral, that is probably now unstoppable. Efforts to stimulate the economy by easing credit and pumping billions/trillions of dollars into the world economy are futile, indeed are making our future ever more perilous - used wisely, such capital could have been put to our future, instead of propping up the past.

    The world economy and our societies are being run by quacks, supported in their certainties by economic systems and theories that more resemble religious dogma than robust intellectual, and ethical, reality. We will all suffer the consequences of this failure of intellect, which your article illustrates perfectly, whatever they turn out to be.

  • Comment number 87.

    #77 Margaret222,

    "Someone is going to have to wind back the [relatively unproductive] government sector from something over 50% of the economy to nearer the 38% when the Labour party took over 13 years ago. This will be painful."

    The real question is WHY? If the UK had a vibrant private sector that offered secure well paid jobs then the people who took jobs in the public sector would have had an alternative. It can be argued that the rise in public sector employment has merely swallowed-up thousands who would otherwise have been unemployed. Surely it is better to have people contributing some form of service rather than merely claiming JSA?

  • Comment number 88.

    An British farce is Greater than a Greek tragedy


    The Greeks Will give foreign bond holders a hair cut and then go for their short and curlies .


    Presumably English bonds are held mainly by our pension funds ,so the future pensioners will get a pair cut if the state defaults OR QE 2,3,4...SINKS sterlink.


    Since politicians and banksters have an indexed linked piece of the pension pie[all pigs are equal] then whats left of the pie in the sty will have to fill themasses WITH CLASS CONSCIOUSNESS.



  • Comment number 89.

    63. At 7:58pm on 28 Apr 2010, Fairsfair wrote:
    133. At 10:25pm on 27 Apr 2010, truths33k3r wrote:

    Thanks for your comments.

    There isn’t a 3rd way. There are many ways.

    We will continue to develop and improve. As many have noted, our democracy has faults but it is better than it was 100 years and that was better than it was 100 years before that. Similarly, our financial systems will improve as we understand the faults of our present one and move onto a better one. That will only happen if someone first of all imagines the alternative and then convinces others.

    We find it difficult to imagine a Tesco till worker and a surgeon being paid the same because it has not happened in our lifetime. We presume that that is the way things must be. Also, we have been taught to value money over everything else so we judge things in terms of money. We don’t feel it is right for the till worker and surgeon to be paid the same because our measuring stick is always money. Actually, money is just a tool, a means to an end and that end is pleasure in its widest sense. We should see money for what it is and control it rather than it controlling us as it is doing at present.

    We don’t think we are in a totalitarian state because the government says that all children must go to school. We might have done so initially. We don’t think it is a totalitarian state because the government says all vehicles on the road must be inured. We might have done so initially. Why would people being paid the same mean that it must be a totalitarian state.?

    If it was possible for everyone to be paid the same and for everyone to have the same freedoms as now would you accept it?

    If everyone else accepted being paid the same would you?

    If Tesco decided to pay all their till workers the same as surgeons are paid, would you accept that?

    >>>>

    Fiarsfair - we have had this type of discussion before BUT - can you tell me how such a mechanism would work for self employed people - your paradigm seems to be based on employees but how could it work if you are earning money yourself especially in the areas where you can be paid cash. If a punitive taxation system was implemented to cap all pay, the self employed in a position to be paid in cash by customers would simply drive a black economy - sounds a bit like greece!

    On your position of a till worker being paid the same amount as a surgeon, why would we have any surgeons left? They would get trained up and emigrate asap. I know you will say not all people are motivated by money but you have to admit that enough people are motivated that there would be an exodus of skills.

    sorry but I still don't agree with your position.

  • Comment number 90.

    Stephanie,
    Your Bloomberg chart does indeed show Greece having a 'heart attack' with UK looking 'alive and well.'
    However, the chart also shows that Greece was as 'fit as a fiddle' until late October 2009, which was only six months ago.
    Of course, reports were circulating over a year ago talking about the sovereign debt problems in Europe, so this has simply been a long time coming. Such reports not only included the PIIGGS, but also included certain central and east European member states. So contagion could be a very painful affair.
    I agree that the UK does have the option of sinking the currency as happened under Harold Wilson (in the era of fixed exchange rates - 1968) and again in the 1970s, when we experience the IMF bail-out.
    I agree with the distinctions you draw in your article between the Greek and UK situations; however, I am always very cautious to avoid uttering the words that "it could never happen here' about anything to do with social, political or economic catastrophes. That smacks too much of arrogance and some ignorance of human affairs.

  • Comment number 91.

    Stephanie,
    Given your academic and practical professional experience, it would be nice if you could spread your thoughts a little more widely on this issue. The focus upon the financial-economic factors is all very well, but the economic problems of Greece and more importantly its government's ability to deal with them are intrinsically linked to the social and political dimensions in its society.
    The bond traders,European ministers and IMF technocrats might be centre stage, but the ordinary people of Greece and their reactions to this situation will also determine the outcome, yet this gets scant mention.
    Economists have a particular set of tools for considering financial and macroeconomic issues, which are often quite narrow; however, an economist with your kind of background can go further and incorporate their understanding of the political and social elements in the mix. For example, Mrs Thatcher's proposed 'poll tax' could be analysed ad-infinitum in terms of the economic and accounting flows for the Treasury; however, it was the social and political reaction by the people which determined the outcome.
    My comments are not a criticism of your writing, which I find often insightful and refreshing; rather, they are a plea to tap your broader knowledge, albeit still with an economic focus, but one which remembers the political and social dimensions of economic behaviour, rather than the narrower financial focus which the likes of Bloomberg generate from most of their talking heads.

  • Comment number 92.

    I'm reminded of the the comment of a certain French General during world war 2 when asked if the collapse of the Polish forces in the face of the Germans could be repeated in France. He replied that "..it couldn't happen here, this isn't Poland"

    Of course it could happen here. Do you think OUR treasury figures are accurate and reflect the true state of the economy? Of course not, QE has massaged the figures until post election time. A hung parliament, then some dithering and we could well head for the same fate. We are simply fifth in line, with no Euro cushion to soften our fall.

  • Comment number 93.

    I think UK public debt is too high - not currently the highest it's ever been but high enough for my liking.

    The role & cost of the uk govt has expanded in all directions since the 1930's to the point where the govt feels the need to 'help' all sections of society irrespective of need (eg: child benefit, pensions, etc).

    Additional & growing 'pipeline' costs to public finances from an ageing demographic, P&P initiatives, etc. have the potential to increase uk national debt to 500% of GDP by 2035 - severely challenging any previous public debt servicing track-record in the uk.
    Previous post-war tricks of inflating away national debt (compounded by regular sterling devaluations) today will be viewed by markets as indirect default & will increase future gilt yields. The old RPIX measure for price inflation is currently 4.5% - history repeating itself ?

    The long-term solution is to re-balance the uk economy by reducing dependency on an unsustainably large public-sector & asset price bubbles towards an embedded enterprise 'can do' culture built on general trade, hi-tech manufacturing & knowledge industries.

    Sweden was where the uk is now about 15 years ago - they turned things around by doing exactly the above - they've even introduced privately-funded schools which have proved very successful - a lesson for the uk ?


  • Comment number 94.

    Amagtimes. -  What should we do, laugh or cry.
    As to which country is going to stump up. Well it proberbly won't be with the approval of it's citizens. 
    Those on this blog who believe that things will return to normal have been watching to much X factor. ( or Leaders debates ). 
    Great blog, thanks to all.

  • Comment number 95.

    armageddion et al

    totally agree

    We are being soft soaped and shafted...this is totllay sinister!

  • Comment number 96.

    re #83 by ForeDeckDave
    Good post. And I think Stephanie's analysis not unreasonable. But her third point is possibly weak. It was our tax system that kicked off the 'credit crunch' (along with a lot of other factors) and if we don't substantially reform it, in all sorts of ways, it could/should/probably/definitely do so again. By the way; the UK as fourth>fifth>sixth biggest {can't remember where we are in decline} economy has a disproportionate effect on the world economy. In addition, we have made enemies of a lot of people who have a lot of spare cash in the last seven years. What might they do with it?
    We take our tax where it cannot be avoided or evaded, unlike Greece - PAYE plus CT plus indirects & VAT - but take so much that a large chunk of the population have no disposable income after essentials - EXCLUDING PENSIONS - are taken care of. There is an impending pension crisis and as the Government keeps telling us we are getting older quicker and living longer. An awful lot of people are heading to having little or no discretionary spend and a lot more are heading into a place where they will be entitled to state support. A big chunk of the taxes we take causes other taxes to rise - especially NI, petrol/diesel duty and Council Tax/Business Rates. We are in a very dangerous spiral. As I understand it, that is not the same case as in Greece but that is not a virtuous situation for us compared to Greece. It is a different disaster waiting to happen but possibly with similar consequences.

  • Comment number 97.

    78 I ask again can any of you Cassandras set out the circumstances in which the UK defaults?

    Hung Parliament resulting in Lib_dem/Labour coalition that refuse to cut public spending. Deficit continues to rise. Heavy taxes kill the recovery and unemployment rises. GDP thus falls. Deficit vs GDP rises to present Greek levels. Civil unrest begins (we had it under Thatcher, don't think it can't happen again). UK credit rating drops. Borrowing gets more expensive. A spiral starts, more tax, more unrest, higher borrowing. Strerling devalues. More QE money printed. Further credit rating drops.

    We give up and go to the IMF. They place austerity conditions that we refuse, knowing riots will start (just like Greece). Defaulting becomes the better option.

    Simples

  • Comment number 98.

    Stephanie,

    Here is a little something from across the pond that you may like to ponder on:

    While we have written ad nauseam about the excessive debt issuance by the United States, we found a recent update written by United States Government Accountability Office (GAO) to be particularly instructive. The update noted the US's budget deficit equivalent to 9.9% of GDP in 2009 – the largest 10 since 1945 – and stated that without significant policy changes the US government would soon face an "unsustainable growth in debt."

    This was not news to us. It goes on to state, however, that using reasonable assumptions, "roughly 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020." This is news! In less than ten years, using reasonable assumptions, there will essentially be no money left to run the US government – 93% of all tax revenues the US government collects will go to pay social security, Medicare, Medicaid and the interest costs on their national debt. This implies no money left over for defense, homeland security, welfare, unemployment benefits, education or anything else we associate with the normal business of government. And the US government is rated AAA!?

    The historian Niall Ferguson recently wrote that, "US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941." It's hard not to agree given the foregoing statements by the GAO. The risk inherent to investors, of course, is what happens when the bond market begins to realize and react to this new level of risk. In a speech earlier this month, Jürgen Stark, who is a member of the board of the European Central Bank, stated, "We may already have entered into the next phase of the crisis: a sovereign debt crisis following on the financial and economic crisis."

  • Comment number 99.

    re #63 "our democracy has faults but it is better than it was 100 years ago" - Really ? Unborn Children don't Vote but 100 years ago our "democracy" didn't vote 'Democratically' to kill 600 a day - every day - in Abortion Chambers.
    Is our financial system any better than it was 100 years ago ? - Our Financial system was developed in pre-machine age (full manual employment) Venice in the 15th Century - we've now moved from machine age (only 20 % of the people need to work) to the computer age (only 2% of the people need to work) - but this out of date system demands "Full 100% Employment" ! - so it's less suited - worse - than it was 100 years ago (PS NEFS - Net Export Financial Simulation is the way to go)

  • Comment number 100.

    This Crisis has been on the Cards now since the Recession first started, and some others will say it has been expected since Greece joined the EEC.

    Whatever the past causes are we now have got today large Tidal-Waves sweeping across ALL the EEC Eurozone Market Economies, whereby Spain and Portugal along with other EEC Eurozone Economy Countries will fall and fail due to a run on the Euro and Bankruptcy.

    Therefore we better batten down the hatches, as its heading our way towards the UK, and it will make the recent Recession look like Childs - Play when it arrives.

    The only thing we don't know yet for sure is in the exact timing it will take this Tidal - Wave to arrive onto the shores of the City of London, albeit: before or after the date of the up-coming and pending UK General Election?

 

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