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UK most indebted nation in the world reveals new study

Posted on 28 August 2011 with 15 comments from readers

A new study from brokers Tullett Prebon called ‘Project Armageddon’ has established the true scale of borrowing in Britain which amounts to a truly staggering £5 trillion or $8.3 trillion.

You would hardly think that reading the Sunday papers today that are monumentally self-complacent and seemingly reckon the UK light years away from Europe in terms of financial problems. Yes, they are in a far worse position.

Once pension fund liabilities and PFI contracts are included the total public debt is £2.46 trillion or 167 per cent of GDP. To that you have to add the £1.34 trillion in financial sector bailouts. The total public debt is therefore £3.6 trillion or 244 per cent of GDP or £135,000 per UK household.

Add mortgage debt

Then there is £1.2 trillion in outstanding mortgage debt and £210 billion in unsecured mortgage credit. Together public and private sector debt amounts to £5 trillion, or 340 per cent of GDP.

‘The biggest single debt increment during the period between 2002 and 2009 was mortgage borrowing, which increased £590 billion between those years,’ explains the report. ‘Many borrowers saw this as an investment, a view which was profoundly mistaken even though many policymakes and even bankers managed to delude themselves otherwise.’

Average UK property prices rose by 70 per cent in this period, until the 19 per cent fall between 2007 and 2008. But most of this private borrowing went into consumption and the public sector did exactly the same thing with its borrowing.

‘Equally worrying, UK external debt is 400 per cent of GDP,’ notes the study. ‘Far higher than countries such as Portugal, Spain or Greece and equates to $143,000 for each man, woman and child in Britain, again far higher than in most other developed countries.’

Bankruptcy possible

The study concludes that there is ‘a very real possibility of national bankruptcy’ but it notes that financial markets are not yet pricing this into UK debt. You have to wonder how long the very low interest rates available to British national debt can persist in view of the quite obvious massive credit risk exposed by this report.

‘Project Armageddon’ is actually pretty thin on predictions as to where this debt mountain will take the UK, apart from flagging up the inadequacies of current government policies, namely that they rely on the resumption of high rates of economic growth that are impossible with 70 per cent of the economy laden with debt.

You are left to draw your own conclusions about the merits of holding sterling-denominated assets with this sword of damoceles hanging over the economy. And the investment conclusion about the UK is surely don’t go there!

Posted on 28 August 2011 Categories: Banking & Finance, Bond Markets, Global Economics

15 Comments posted by readers:

Comment by John Mark - 28 August 2011

Thank you for highlighting this report, Ed. It is so difficult to find out how indebted Britain is.

I am beginning to think that liberal democracy is just too expensive. Yet, the West is wanting to export it into Arab countries and elsewhere. Even the expansion of democracy into, for example, Libya increases the indebtedness of Britain and others.

One blog-commenter in the Daily Telegraph this morning described how, in the last few days, he was not allowed to take out all the currency he asked for from his bank account in a French bank. He was only allowed a proportion of his currency, and he was not allowed a second go.

Apparently, the currency you deposit belongs to the bank in the last resort, and this poor man is coming up against counterparty risk from the bankers.

Comment by philcu - 28 August 2011

Scary stuff indeed…which begs the question as to what the investor of UK origin should do with his lucre. You can’t put it all in PM’s, short ETF’s and UAE stocks.

Given that you should only invest in what you know and understand, I am hoping that some UK defensive stocks will weather the storm, especially those with strong international exposure.

Comment by obewon - 28 August 2011

The UK is in deep trouble, yet the UK banks have done an excellent job of masking their massive indebtedness, and the indebtedness of their country. Truly a sword of Damoceles, as the Ed. has said.

The corrupt British and the American financial gurus have been “pulling the wool” over the eyes of bond investors for years (regarding their credit-worthiness) via the creation of massive amounts of synthetic products (i.e. derivatives) to aid their unjust cause, much to the dismay and confusion of the investor public.

Take a look at Greece as one small example; over the past 3 years, US banks have been very successful in hiding Greek debt problems, via the sale of CDSs to keep the Greek bond rates as low as they could. US & European banks have done the same with sovereign debts of other European nations, in a vain attempt to save themselves.

But as John Mauldin has repeatedly said, “The end-game draws nigh!”

Comment by John H. Clark - 29 August 2011

It would be interesting to do a similar “total debt” assessment on other major developed economies to enable a direct comparison.

I suspect the UK is not the only country to have massive debts “off balance sheet”.

Comment by Bill near Slidell - 29 August 2011

The amazing thing is how the British pound remains so strong against the US dollar. Think about the natural resources of the USA, versus those in the tiny UK, the Northern third of which is a virtual wasteland, suitable only for sheep. The USA has vast food production, the world’s largest coal deposits, huge untapped copper deposits (visit the Rio Tinto web site for the US copper deposits, which are some of the richest ever discovered, that they are planning to mine), large gold mines, nearly half of the world’s best universities, a growing population of 310,000,000, huge shale gas reserves, the largest shale oil deposit (2 trillion barrels) in Colorado and Utah, near zero chance of ever being invaded by a foreign power (The dumbest idea that I can think of) a great inland waterway system, a lot of minerals yet to be discovered in mostly unpopulated Alaska which is rather large, rare earth deposits ( a Canadian company just found a big rare earth deposit in Nebraska, of all places) a nearly unlimited supply of cheap wood, and the best large highway system. The USA has many of the world’s most creative and profitable companies. And for those who think Americans have become lazy, you may want to come to New Orleans and see the miles of 25 foot high concrete flood walls, huge pumping stations, levees, and bridges that have been built since Katrina wrecked this area. To quote a visiting engineer from the Netherlands, “What you built in 5 years, would have taken 20 years anywhere else, except possibly China.” Working in this HUMID heat is NOT easy work. Sweating doesn’t cool you off because the water can’t evaporate. You just get wet and hot. Lazy people don’t get $14 billion of construction work finished in 5 years. The USA can still attract the best and brightest from the entire English speaking world. The man developing his own space program, (SpaceX), Elon Musk, (who created Pay Pal & Tesla motors) is from South Africa. He is mad as hell that NASA is being ruined by the dysfunctional Congress and internal bureaucratic decay, so he is going to keep the USA #1 in space himself !
All that, and the pound is worth a LOT more than the US dollar, which will be the reserve currency for a while yet. Go figure.
Japan has a 200% debt ratio with nearly no natural resources sitting on a fault line. Why do people invest in that money?
A lot of what happens in the world of finance is based on tradition and habit.
As Abraham Lincoln warned, America will never fall from the outside, it will decline from the talking heads of hate radio, and propaganda TV pursuing their own divisive agenda of private power and individual greed. Read, “How Roger Ailes Built the Fox News Fear Factory” by Tim Dickinson in the May 25, 2011 article on http://www.rollingstone.com to see how it is done. It is a little over done, but not message is correct. I like the way they constantly trot out that Bolton guy to warn of this, or that dire threat to the largest military power that has ever existed. Wasn’t he one of those geniuses that said Saddam nearly had the bomb? You ever notice how people like him, Limbaugh, and the rest, never went over there to get their legs blown off by an IED. Cheney either. They always seem to miss the dying and maiming part, but are always eager to send someone else to fight some imagined threat halfway around the globe. They just collect royalties on books about the wars they encouraged other people to get killed in.
End of soap box rant. I feel better now.
Keep an eye on those European banks.

Comment by philcu - 30 August 2011

Bill:
I shall show your comment about the northern third of the UK as “a virtual wasteland, suitable only for sheep” to my proud Scottish friends!

It is indeed a sobering thought to compare the colossal resources of the US with small countries like the UK. They can only compete on the basis of human ingenuity. That requires a focus on education and a forward-thinking political leadership.

I see no evidence of either.

Comment by obewon - 30 August 2011

** skims Bill’s rant **
** gets Bill’s point… which is well taken **
** looks at the flip side of the USA **

Bill:
You may want to take a look at Nial Ferguson’s video that he made back in 2010 regarding the on-going financial crisis among big banks (that gambled with other folks’ money), how they have wrecked the world, and why this is likely to result in the rapid decline of the USA. It’s entitled “On the Verge of Chaos”, and you can find it on Fora TV:
http://fora.tv/2010/07/08/The_Financial_Crisis_Will_It_Lead_to_Americas_Decline#US_The_Next_USSR_Ferguson_Says_Economy_on_Edge_of_Chaos

Comment by Bill near Slidell - 31 August 2011

philcu:
I should talk. All my ancestors came from the UK and Scandinavia. You can remind your Scottish friends that I had to spend several early mornings, right after sunrise, cleaning mildew off my driveways, sidewalk, and patio with a pressure washer. Mildew covered concrete is rather ugly, when you can avoid it. And tell them it has been between 96 and 100 degrees F here nearly every day for the last two weeks. They will never have that problem. Don’t mention that Hadrian built his wall because he figured that the land North of it wasn’t worth losing a lot of Roman soldiers to conquer. (I admit that the crazed inhabitants of that region may have influenced his decision somewhat.)
The poor public education system, and the political system funded by private money, are the greatest threats the USA faces. Childhood obesity, largely from computer game addiction, is a very close second.
I am fortunate to live in St. Tammany Parish, Louisiana, nearly across the street from Clearwood Jr. High School. They still run the public schools here like the private Catholic schools I attended in New Orleans, as a child. I don’t see kids arriving late, or hanging out around the school. They don’t even leave trails of trash on the way home at 3:30. On Tuesday and Thursday nights, the parents attend some kind of meetings. The parents don’t even block my driveways at night during the winter when it is dark at 7 P.M.! I guess that is why it is one of the best school districts in the country. The parents are involved in their kid’s education.
You may not want to keep too much money in any one bank. The FDIC insurance limit in the USA is $250,000 per bank. Satyajit Das seems to think that another worldwide banking crisis may be coming. And the deal that Bank of America gave Buffett is not a good sign. Something is wrong there.
And I admire the UK. They gave us the Industrial Revolution and helped spread the rule of law and efficient government around the world. They weren’t perfect, but who is? Like someone said, don’t let the perfect be the enemy of the good, or something like that.

Comment by Paul King - 31 August 2011

More claptrap and sensationalism. Tullet Prebon’s study was probably carried out by no more qualified dopes than any other prediction available right now!
Agora Financial have total US debt and obligations at 370% of GDP! Whatever Mr. Market has in store for us over the next decade…. where do you want to be? My capital will be with the inventors, the innovators, the designers, the experienced!
The copiers & fakers of the emerging markets will stall unless the US, UK etc…. keep building the path of desires! Ask yourself what product, car, handbag, watch etc of the typical soul’s desire started life in the so called “Emerging Markets?”
Loved Bill’s description of the “Southern Faroe Islands”.

Comment by They say its not like 2008, Gordon Brown Says its like 1930 | Nassau Boy's Trading Thoughts - 19 September 2011

[...] But alas, big boy Gordon might have an idea … HOPE ITS NOT LIKE HIS LAST ON, Lol selling all England’s GOLD! Asking the former British Prime Minister Gordon Brown how to fix the world economy is a bit like taking advice from Nick Leeson, the man who bankrupted Barings Bank with fraudulent trading. He should know. He was the person who loaded up the UK economy with the highest debt in the world and left it so exposed (click here). [...]

Comment by lids - 24 November 2011

Another dig at Blighty from an expat website. Imagine my surprise. How is life in the sand pit? bearable this time of year? We are having a lovely warm autumn in England, beautiful colours in the countryside and the beer tastes just great.

Comment by paul maleski - 11 December 2011

In defence of Scotland.
My late mother was of Glasgow/Irish stock; yes, the Celtic peoples are , tough, violent, and fervently patriotic but they are also incredibly resourceful. The decorated savage Picts put the fear of God into the military heart of the Roman Empire. The Picts could subsist and thrive on craggy rocks, Pictnick on bracken, heather, thistle, and raw, poached, venison and Aberdeen Angus, all washed down with looted booze. Culturally, in their spare time they raped wild stock and pillaged, pillaged property. If you want an interesting read, I recommend ‘How the Scots Invented the Modern World’ by American author Arthur Herman. Hadrian is spinning in his grave with envy of Scottish world wide political/economic/philosophical influence. The Jocks ain’t daft! Believe me.

Comment by davie1003 - 15 January 2012

The UK suffered a loss of their “intelligentsia” in World Wars and have not recovered. Things have changed…….entropy may be a factor here.

Comment by Lance Franz - 10 March 2012

Don’t simply retire from something; have something to retire to.
The most difficult thing to comprehend on the planet may be the tax.

Comment by produit piscine bayrol - 26 June 2012

In modern business it’s not the crook that’s to become feared most, it is the honest man who doesn’t know what he’s doing.

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