A reality check from Standard & Poor’s

May 21, 2009

REUTERS— Neil Collins is a Reuters columnist. The views expressed are his own —

Standard & Poor’s could have chosen a better day to kick the British economy, by placing the UK onto “negative outlook”, the usual precursor to a downgrade of S&P’s rating of an issuer’s debt.

The move came minutes before the Debt Management Office closed its massive auction of 5 billion pounds of 2014 stock, and minutes after the release of figures showing the Public Sector Net Borrowing Requirement leaping to 8.5 billion pounds in April, a sum which not long ago would have been considered high for a whole year.

Economist Howard Archer at Global Insight immediately called the figure “dire, starting the new fiscal year off as it is highly likely to continue.”

S&P, meanwhile, now fears that the net general government debt burden “could approach 100 percent of GDP and remain near that level in the medium term.”

It’s hard to describe the UK public finances as anything other than a disaster area. The forecasts made in last month’s Budget looked optimistic within days, and even these require the DMO to borrow 220 billion pounds this financial year, or almost a billion pounds every working day.

Yet while the DMO soaks up cash, the Bank of England is desperately creating it. Its “quantitative easing” programme has been in full swing this week, buying in 1.326 billion pounds of a stock which looks very like the one that the DMO was issuing just one day later.

The experts will tell you that because the life of the new stock is not quite five years, it falls outside the Bank’s five to 25-year target zone for QE, and is therefore qualitatively different. This is pure mumbo-jumbo. Essentially what is happening is one arm of the government is creating money for another arm of the government to borrow.

The traders can hardly believe their luck, selling expensively to the Bank and buying cheaply from the DMO.

This waste of taxpayers’ money would be bad enough, but the real damage is the false sense of security this round-tripping produces. Britain is in real danger of falling into a debt trap, where the cost of borrowing spirals up with the amount the government has to raise.

As the rating agency’s reality check concludes: “A government debt burden [of nearly 100 percent of GDP] if sustained, would in S&P’s view be incompatible with an AAA rating.”

Loss of that rating would lead to a higher cost of government borrowing, damaging the chances of avoiding the trap.

Were the Labour administration not in total funk, it might seize on this report to admit that its spending plans are not sustainable. Capital projects, like the NHS IT scheme, ID cards, Crossrail, aircraft carriers, the Eurofighter and much else will have to go, and the next government will have to impose real cuts in the core spending of education, health and welfare.

S&P’s warning shot shows that the phony war is over, and the real pain lies ahead.


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Very few nations in the developed world do anything sustainably. Not environmentally, fiscally or with their of use of resources. The Anisazi, Maya, Easter Island and even the State of Montana know(knew) full well the consequences of using resources until they were gone. Empires come and go in search of resource wealth. The “pain” will come. We will either choose wisely or out of greed. Never the less the way societies function today is unsustainable making change inevitable.

Posted by Anubis | Report as abusive

Unlike the Anisazi, Mayans, and Easter Islanders it’s not too late for us. All it will take is a complete rethink of everything (a little bit of leadership from the top wouldn’t go amiss either).

Posted by Peter H | Report as abusive

Certainly Government spending needs rethinking. However, I don’t believe capital projects should be the top of the list. They may be easier tarkets and there are some which are unnecessary, but they do, at least, deliver something tangible to the public. The big spending is on the annual running costs of the public sector. Cutting here will be harder but will yield benefits year after year not just as a one off. But the management of the public debt shows big governement is not efficient government.

Cutting the Eurofighter will involve compensation payments which may exceed the cost of the order! Cancelling the aircraft carriers will render the navy ineffective. Fine if world peace is guaranteed, not so great if we are facing time of considerable geopolitical change, which seems more likely.

Posted by Stephen O | Report as abusive

Don’t worry the ratings companies will never downgrade. If they do the regulators will come knocking for the recent oversights they made on all those toxic assets. So relax, let the central banks keep printing money and hope you don’t own any bonds. ( that’s right don’t believe the feds effort to buy back bonds to lower there interest rates. They are gaming the market ! sell $100 in bonds buy $10 back NOT SUSTAINABLE !

Posted by gd | Report as abusive


Posted by gd | Report as abusive

Finally a global realist speaks of our enormous debt problem!

Posted by Eldon Lopes | Report as abusive

I keep hearing and seeing we have all this debt. Who do we owe it to? What is the interest rate on that debt? Where are the Debt holders offices? It board of Directors? Can we negotiate? I know China holds 1 trillion of our bonds, where are the rest?

I might be wrong, but I thought i read somewhere that Corporate Bonds, all together total around 600 trillion; where did all that money come from?

Posted by C.D. Walker | Report as abusive

CD it is all a swindle. I buy an antique for 10,000 dollars and insure it for 30,000. In reality I probably payed to much in the first place. I suspect the process by which equities are valued and traded is similarly flawed. Their true value is difficult to assess and most likely sold way over value. In turn investors cover their bet with hedge funds and credit default swaps that may in truth greatly exaggerate the value of the equity even further. Now that the institutions who back these securities (oxymoron) are crumbling they expect the U.S. taxpayer to bail them out. Social Security, pensions, health care and education will all be wiped out.

600 trillion might be right. To negotiate international debt is by definition default.
U.S treasury $4 trillion and rising…
China $750 billion or so…
Japan $600 billion…
Great Britain $500 billion…
Social Security unfunded liability estimated $40 trillion..
Mortgages, equities, bonds, derivatives? Your guess is as good as anyone’s.

Posted by Anubis | Report as abusive