Could the UK become a banana republic?

[Renton 17901]

If no buyers are found for government gilts, out debt interest could bankrupt us

 

It threatens to become the worst case of indigestion yet seen — and one that even a limitless supply of Alka-Seltzer would fail to cure.

 

The Government was already planning to sell a record £220 billion of bonds — known as gilts — this year, followed by more than £240 billion in 2010-11 and then almost £250 billion in 2011-12.

 

In all, over five years, about £900 billion of gilts are due to be issued — about twice the size of the entire UK government bond market at present.

 

Potentially, that figure may rise after yesterday’s worse than expected GDP figures and gilts issuance this year may be nearer £250 billion than £220 billion. There are three obvious buyers for these new gilts. The first are Britain’s banks which, under new Financial Services Authority rules due to come into force in October, are obliged to hold a greater proportion of their capital in liquid assets such as gilts.

 

The second is the Bank of England which, under its “quantitative easing” scheme, has been buying assets such as gilts and corporate bonds from banks and other financial institutions. This was aimed at making gilts less attractive so that investors would be more inclined to direct their money towards corporate borrowers — making it easier for them to stay in business or expand.

 

But existing gilt-market investors may not react kindly to all this paper being thrust at them. That is why it is too dangerous for the Treasury to rely on overseas investors who, at present, own one third of all gilts. They are under no obligation to hold gilts and they will have no qualms in selling. This is particularly likely as there is going to be increasing competition among governments in coming years to attract lenders. The US Government alone will issue about $2 trillion this year.

 

Much of this is likely to be scooped up by Chinese investors, who are particularly keen on buying dollar assets, partly because it helps to depress the value of their own currency. Faced with a choice of buying sterling assets or US Treasuries, priced in what remains the world’s only reserve currency, many investors are likely to plump for the latter. It is highly unlikely that the Chinese, for instance, will be keen on a British takeaway.

 

If no buyers come forward for these extra gilts, as is possible, the Government, and whoever wins next year’s general election, faces a big headache. Servicing the national debt, which is predicted to hit £1.2 trillion during the next five years, will cost “only” £28 billion in 2009-10 — but that could easily rise if the Government has to offer more attractive rates of interest to investors.

 

As John Wraith, the head of sterling rates product development at RBC Capital, says: “If investors get worried, and start to think this is the norm, they may sell the market or demand much higher yields. At the moment, interest payments on the national debt are 3 per cent of GDP, but you could easily see it get to 6 per cent. Six per cent of £1.2 trillion is more than £70 billion — and that’s just the interest bill.

 

“That is unaffordable. If you get to that, that is IMF territory — it means that you, as an economy, have gone bankrupt and can no longer afford to run your country’s finances. That’s a scenario, not a forecast, but it’s a perfectly feasible one.”

 

For the time being, most international investors see the current crisis as still being global, rather than Britain’s fault. But the Government — or a Conservative successor — will need to make tough decisions in coming years to prove that it has brought the fiscal situation under control.

 

If not, it is perfectly possible that the IMF will do it for them, relegating Britain to the stature of a Latin American banana republic in the process.

 

 

Read this in the Times this morning. I'm pretty ignorant about macroeconomics etc but stuff like this scares the shit out of me. Addressed at people with more understanding, is this really a feasible scenario, or is it just scare-mongering? How could things have gone so tits up in such a short space of time?

[Fop 1]

The question is really would the UK be the worst banana republic?

[Renton 17901]

The question is really would the UK be the worst banana republic?

 

Pathetic.

[Park Life 70]

Basically the Gov borrow money against future tax revenue. The U.s is running Govt debt approaching 400 trillion (that we can see). As long as we don't go mad with it should be fine.

 

However there are serious flaws within the Capitalist footprint so one never really knows these days.

[Renton 17901]

Basically the Gov borrow money against future tax revenue. The U.s is running Govt debt approaching 400 trillion (that we can see). As long as we don't go mad with it should be fine.

 

However there are serious flaws within the Capitalist footprint so one never really knows these days.

 

Are you sure?

 

Edit: Parky I make that more than one million stirling for every head of population.

Edited April 25, 2009 by Renton

[Jimbo 133]

The question is really would the UK be the worst banana republic?

 

 

unquestionably !

 

 

The climate is too cold for them, same could be said for Coconuts too.

[NJS 3989]

This brings to mind Hall's bullshit scare tactics saying that Newcastle could go bust in 91 - Barclays would never have called the debt as their only chance of getting the money was for NUFC to continue.

 

If the Chinese did "repossess" the UK who the fuck would they sell us to?

[trophyshy 6441]

If it's the only way to abolish the royals I'll eat Chinese bananas for a few years.

[Fop 1]

The question is really would the UK be the worst banana republic?

 

Pathetic.

 

Would there be countries still worse than the UK?