Yesterday the BBC’s business correspondent Robert Peston drew attention to runs on countries that have borrowed too much. He pointed out that Iceland, Ukraine, Belarus, Hungary and Pakistan are already experiencing this, and wondered if South Korea might also fall into such a plight. He told us the first five countries have gone to the IMF to borrow because they can no longer borrow on the scale they would like on overseas markets at a sensible price. Just as media attention to a number of stories about British banks talking to the Treasury helped undermine confidence, so now there are media hints at problems ahead for the UK in raising all the money it needs to borrow.
None of this is very helpful when there is already a run on our currency. I have drawn attention before to the sharp falls in sterling that have etched themselves into the last three months. In the last few days sterling has fallen especially heavily against the yen, as well as falling against the dollar. Of course international investors are getting worried about heavily overborrowed countries, especially when their lead or dominant sector like the UK is going to go through a rough period of decline. The UK government is about to discover how dependent for revenue it has been on property, oil and financial services. All of them will yield far less in current conditions than they did in the heady days of the credit boom. This is one of the reasons why I have been suggesting to the authorities in the UK that they might like to reduce the amount of money the taxpayer needs to borrow to buy bank shares, finding other ways of buttressing bank balance sheets.
There has to be a limit to how much it is realistic for any government to borrow. The government does have to take into account how much the private sector has already borrowed in its country, as the overseas investor will look at the total debt and interest burden. It is the same people having to pay off both lots of debt. At the moment there is the danger in the UK that the taxpayer will borrow money to buy bank shares. The banks will then reinvest the money they receive for their new shares in government debt, creating a money go round. Overseas investors will not see it as a self cancelling transaction, as it puts the taxpayers on risk for all the difficult debts owned by the banks, and exposes taxpayers to more potential losses which means more borrowings to meet them.
Just as there has been a flight to quality in bond markets, with people fleeing from risky private sector paper in companies that might get into trouble in the financial crash or in the subsequent recession, so there could now be a flight into quality in the world of government paper. Investors will look to buy into the safest, most politically secure, least borrowed countries. Divorcing Prudence could prove an expensive option at such a time.
The big debt issues have started as the Treasury attempts to raise the huge sums needed to feed the banks and the public sector’s appetite for spending at a time of sharply reduced revenues in crucial areas. Oil taxes will be well down, Stamp duty and other property taxes will be badly hit, and tax on financial service and banking profits will fall sharply. Given this, the government needs to be careful with its overall spending, and needs to find ways to get its loans to banks back as quickly as possible. Nationalising banks was always going to be the dearest and longest term way of rescuing banks at risk. It was also always the way to damage the government’s own credit rating the fastest.