From Andrew Garthwaite and his team at Credit Suisse, a scorecard of OECD countries most likely to face government debt funding problems.
Click to enlarge:
So, Greece, Ireland, Spain and the UK are seen as the most vulnerable – but what about the US, which attracts a top-ranking score using the CS metrics?
From Credit Suisse’s latest weighty tome on the “Big Issue” of sovereign debt:
The US does look vulnerable, but given that it has a reserve currency, it can use this to manage its funding problems. Its external debt is largely dollar denominated (and thus again allows it to ‘inflate’ its way out of its problems). We therefore believe it is inappropriate to rank the US against all other countries – and we show the US as a memo item at the bottom of our table.
Garthwaite and team actually believe that, setting “peripheral Europe” aside, the UK is the G7 country most likely to face a severe government funding problem.
Credit Suisse gives four reasons for this conclusion:
(1) its budget deficit and the likely degree of fiscal tightening required would be worse than in any other OECD country. The OECD estimates that the UK’s cyclically adjusted budget deficit will be 7.2% of GDP this year.
With the rising prospect of a hung parliament at the general election due before June (the latest YouGov poll indicates only a 2% Conservative lead over Labour), the Conservative party may be forced into making promises that would make it more difficult for them to cut spending once in office—were they to be elected.
(2) The BOE has accounted for more funding of the budget deficit than in any other country…and QE is now complete. Moreover, QE as % of GDP has been larger than any other OECD country (14% of GDP).
3) Both core inflation (3.1% yoy in January) and inflation swaps in the UK are much higher than elsewhere. This makes any additional QE more problematic for the BoE. Recall, the BoE governor is required to write a letter to the Chancellor if inflation is more than 1pp away from target and the openness of the UK economy means that each 10% off sterling adds 1% to inflation (thus the MPC has to be mindful of sterling).
(4) About 30% of the UK government debt is owned by foreign investors—and sterling is not a reserve currency.
Oh, and Garthwaite notes that the last time Britain had to be bailed out — by the IMF in December 1976 — the cyclically-adjusted primary deficit and the debt to GDP ratio were only 4 per cent and 53 per cent, respectively. They’re 7 per cent and 78 per cent now.
One good piece of news for Blighty – it has the longest average maturity of government debt:
Much more on this in the usual place.
Related links
‘If you really want a fiscal problem, look at the UK’ – FT Alphaville
The UK’s heading one (AA) way, Citi says – FT Alphaville
The full faith and credit of the UK – FT Alphaville
On the not-unlimited investor appetite for government bonds – FT Alphaville