Where have all the money lenders gone?

The key issue that has bugged me since the Northern Rock bust up has been whether there have been enough money lenders out there, with enough money, to buy up the shed-loads of debt the Government is going to shovel out into the market. At long last, thankfully, in the last couple of days, one or two members of the commentariat have begun to join the discussion.

During this year the Government will be looking for £175bn of new debt on to which it will reschedule some past debt, giving a total £220bn. Let’s remain in optimistic mood and assume the Government has, for once, got its calculations right.

We are not, however, the only country in search of lenders. Every other G8 country is in the same boat.

That is why it is so fatuous of some commentators to assure us that everything will be alright on the day because our debts now are nothing like the size they were during the Second World War. Surprisingly, Sam Brittan of the FT is leading this particular charge.

The two positions could not be more different, except that at both times our poor old country was in hoc. During the war years America, and those countries that lent to us, were in substantial surpluses. Moreover none of them were trying to borrow while we attempted to balance our budget.

Ambrose Evans-Pritchard, of the Sunday Telegraph, headed his column this week with the caption: ‘The capital well is running dry and some economies will wither’.

He cites “Commerzbank said every European bond auction is turning into an “event risk”. Britain too finds itself some way down the AAA pecking order as it tries to sell £220bn of Gilts this year to irascible investors, astonished by 5pc deficits into the middle of the next decade”.

To drive his point home, Evans-Pritchard cites the US hedge fund Haymen Advisors which is betting on the largest wave of state bankruptcies and restructurings since 1934. The worse profiles, according to Haymen Advisors are almost all in Europe ‘the epicentre of leverage and denial’. American banks have written down half their assets compared with only 17% of their European equivalents.

Evans-Pritchard also countered another foolish piece of whistling in the dark. The tune being bellowed here is that Western Governments have been successful in the past in borrowing from the petro-powers as well as China, Russia and other emerging nations, so why shouldn’t they be as successful now.

This source of capital has been turned off. China is using a huge chunk of its surplus to reflate its own economy – in the hope of preventing widespread disorder and perhaps revolution. The crash in the oil price has seen Russia and Venezuela drastically revising their surpluses and, as if to put the boot in, these countries have become net sellers of US and European bonds.

There have been significant national bankruptcies before and there is nothing special which will prevent a similar scenario today. We kid ourselves that we are now much more knowledgeable in how to manage crises.

We may be, but we do not have time left to debate this point. What we do know is that the international institutions which we set up to create world financial order are themselves struggling to come to terms with the new world in which they, and we, now find ourselves.

All this makes it near criminal that the Government and the official opposition are bent on not spelling out now the tax changes and public expenditure cuts they envisage to bring the public accounts into balance in the short to the medium term.

Their failure to do so leaves Britain dangerously exposed in the world ranking of safe havens for other people’s money. It now costs significantly more to insure British government debt than it does the debt issued by Cadbury’s. The loss of our triple-A rating beckons.

That is why it is urgent that the political class in Britain gets real. We still have time – hopefully -to debate calmly tax and expenditure changes. Above all we still have time to make those changes radical.

As soon as the Government finds it nigh impossible to raise the next necessary tranche of debt there will be a wholesale exit from Sterling. The Government will then be fighting not simply for its own life, but for that of the whole country. Politicians must now act to head off that looming possibility.

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4 Responses to “Where have all the money lenders gone?”

  1. Disillusioned Voter Says:

    Frank,
    You are right are political leaders are in a state of denial at present and we shall all suffer as a result. The level of incompetence in Whitehall at present is scary, how can the Chancellor stand up and make predictions about the economy which are proved to be seriously in error only days later by the release of official statistics. This is and should be a no confidence vote issue, but cowardice on all side and the continued feeding at the expenses trough is getting in the way of managing our economy.
    When the country is heavily in debt and the mayor of Calais is complaining about the impact of assylum seekers on their town (due to the high levels of benefits available to these imigrants in the UK) you know something is seriously wrong with our governance. Whilst I would loeve to believe that our politicians would act now in a responsible way to safeguard our economy, I fear that this Administration is increasingly adopting a scorched earth policy in the knowledge that it won’t win the next election so the problem can be handed to Cameron (and he can take the blame for the cuts).
    Personally I see your party heading for the wilderness if it fails to act quickly, the economic legacy of the credit crunch is likely to extend for more than two parliamentary terms and few of those sitting on the Government benches will see Ministerial office again.

  2. Nick Says:

    If you don’t cut now, you are going to have to cut in the future even harder because of the interest payments you are going to have to make.

    I agree with the previous poster. One reason why the Tories are proposing a Doomsday book of the mess of the public accounts. That will include the Ponzi state pension schemes.

    The Tories next step will be a tax, hypothecated against paying off the debt to appear on every pay slip. Probably called a Labour tax because it will be a tax on labour.

    I’ve no doubt in this case they can pin the mess on Labour, and quite rightly.

    The end result of the mess created by Brown and Blair is savage cuts in services. You can’t raise taxes to cover the black hole and the level of borrowing required is just too much for the market to bear.

    The tories seem to have avoided the elephant trap laid by Brown in the budget over 50%.

    The end result of this fiscal incompetance by Brown is going to be Labour losing the election for a long time. He’s also directly responsible for the major cuts in services that follow and the high level of taxes.

    He’s been far from prudent, and people have worked out what’s going on.

    They see the high level of corruption by MPs, and even more to the point when other MPs say the majority aren’t corrupt, they know they have stood by and let it happen.

    Come July and the publication of receipts, I think that’s going to be the trigger for a GE.

    If not, the boycott of non-index linked gilt auctions will show the game is up.

    Nick

  3. Disillusioned Voter Says:

    I agree with Nick that “He’s been far from prudent, and people have worked out what’s going on.”

    The bills Brown has ratched up under PFI/PPP for virtually all of the infrstructure spend since 1997 need to appear in the ‘Doomsday’ book. There are aspects of this spending which are more akin to an alcoholic in an office licence with a corporate Gold Card … spend, spend, spend … and no sign of prudence.

    Unfortunately the spending is coming to an end and repayment is due, given the nature of some of the PFI financing it may be interesting to see what will happen if any of the delivered deals require refinancing over the next few years!

  4. Nick Says:

    On the PFI deals, many have inflation linked kickers. Those who financed the deal were worried about inflation. If inflation kicks off, and you’ve agreed a fixed price deal for suppling a hospital 20 years ago, you’re bankrupt. So they included the ability to convert to inflation linked at certain points in time.

    So if the government tries the inflation route to get out of its problem, bang, they will all convert.

    ie. Currently inflating your way out of debt really doesn’t work because the vast majority of the government liabilities such as pensions, benefits, and health care are all inflation linked.

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