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UK more indebted than Portugal, Ireland or Greece

Posted on 10 December 2010 with 5 comments from readers

In the authorative Economist league table of countries most endangered by high levels of public and private debt below it is the UK that comes second after Spain, and not the eurozone periphery of Portugal, Ireland and Greece.

Japan is ranked after the UK and the US follows straight after Greece. It is an astonishing indictment of the leaders of the developed world that they are ranked up with the so-called economic basket cases.

UK debt super high

Overall debt as a percentage of GDP – just one part of the league table below – actually has Japan at the top at 471 per cent, followed by the UK at 466 per cent. Spain is second in Europe at 366 per cent and the US posts 296 per cent.

For those of us living in the Oil States of the Persian Gulf it would be good to see the books for our countries too but they are not open to this extent. But a reasonable supposition would be that the UAE and Kuwait would lead on debt, with Dubai’s $110 billion debt balanced by Abu Dhabi’s net creditor status, although meaningful comparisons would be difficult.

In any debt situation there is no problem until the debtors can no longer repay the loan or interest. The problem for the developed world is that this tipping point seems perilously close and, as bond vigilantes daily force up the cost of borrowing, the day that they cannot pay looms closer.

Only a combination of high inflation and much higher interest rates can rebalance this precarious juggling act, and that is what now seems on the cards. To say that this will make for a rough ride in global financial markets for the next couple of years is a considerable understatement of the obvious.

Debtors ultimately lose

Usually if debtors cannot pay their debts then one way or another they end up losing assets to the lenders. But when you unwind such a long and complex global chain of debt arrangments it is very unpredictable who will end up with what and where.

Essentially you want to hold real assets or cash in such a crisis without debt. The idea of running up debt to buy an asset before inflation to give you the asset at a long-term discount is fallacious for the soaring cost of debt will likely bankrupt you first.

Using cash to do the same would also not work because in many cases the rising cost of debt will initially cause a deflation of asset prices such as houses, for example. What would work is buying asset prices hit by higher interest rates with cash or new debt when rates have peaked, not before.

2011 is going to be exceptionally challenging for investors and that is why we have more and more of our website readers signing up for our monthly newsletter with the missing actual portfolio selections as well as the raw analysis (click here for a subscription).

Posted on 10 December 2010 Categories: Banking & Finance, Bond Markets, Global Economics

5 Comments posted by readers:

Comment by Mike - 10 December 2010

Yeah, but the British press loves to attack the pigs. Portugal would prefer to see Brazil or even China to buy its debt, it seems that other European countries other than the pigs may have a burning house shortly.

Comment by Abu Malik - 10 December 2010

Why doesn’t it having any impact on British economy then, a real question? Everything seems all right here. If you look at house prices in London they are still all time high compared to US where its falling steadly ot PIIGS, but UK!!! & £ very strong indeed. Barclays just given their approval to it as well. So when do you think the old Blightly will be affected if at all?

Ed Note: taxes rise in the New Year! The bond vigilantes will eventually get to the UK…

Comment by Richard - 11 December 2010

But look at the years to maturity of sovereign debt. That’s more telling than it looks: like Iceland and Ireland, Britain’s problems with total debt are partly due to international borrowing/lending by its banks. But unlike Ireland, its banks didn’t borrow excessively abroad to lend at home, and unlike Iceland’s, they didn’t borrow and short and lend long – well, they did both of these things but not nearly to the same extent and the problems are pretty much now accounted for.
By 13.7 years time, if current fiscal policies are maintained, we should be OK.

Comment by David - 13 December 2010

Spain Portugal and Greece are minnows compared to the UK economy. UK has the 3rd highest GDP in the EU. The GDP is 30% above Spains, the others are too small to calculate.

The main difference is that the UK has a working and semi-efficient tax collection system. When they say they will get a pound in taxation they will get a pound or very close. All the other countries have massive black economies where a significant part of the GDP stays well away from their Governments.

Based on the table above I would be much more worried about Japan than the UK.

Comment by Paul King - 13 December 2010

The table is just a bunch of selective statistics aimed at deception. Ability to settle debt is the key not the amount. Even debt taken as a % of GDP doesn’t tell you too much because the GDP numbers are always calculated in favour of that month’s government message.

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