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.
Before that you need to know what exactly happens when the price starts to base. It is here that the traders and the institutions are either selling from their portfolio or adding on to their portfolio. This is called distribution or accumulation respectively. If accumulation is happening then the basing will breakout. Why not try this out?
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.’
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!