Who would lend to a bankrupt Britain?

12 December 2009

Alistair Darling’s budget forecasts assume that Britain can keep borrowing all it wants for the foreseeable future.We may not be so lucky, says Irwin Stelzer

Federico Sturzenegger and Jeromin Zettelmeyer are not exactly household names. They are, respectively, professor at the Universidad Torcuato di Tella, and an adviser to the International Monetary Fund. Some months ago, as I watched Britain roll up debts that would have been unthinkable only a few years ago, I moved their book, published in 2006, from a back shelf to the top of my desk. Where it sat, unmolested, until two things happened.

First, rating agencies got nervous about the quality of the sovereign debt issued by the UK. Next, Dubai World asked its creditors for time to meet its obligation to pay interest on $26 billion of its $80 billion of debt. So Debt Defaults and Lessons from a Decade of Crises (MIT Press), seemed worth a second look.

It was. Defaults by sovereign governments have been with us since at least the 4th century bc, when ten of 13 Greek municipalities defaulted on their loans. France (eight times) and Spain (six times) hold the record for defaults between the 16th and the end of the 18th centuries. ‘Only in the 19th century, however, did debt crises, defaults, and debt restructurings — defined as changes in the originally envisaged debt service payments, either after a default or under the threat of default — explode in terms both of numbers and geographical incidence.’

This history becomes increasingly relevant in the wake of Wednesday’s Pre-Budget Report — which told us that the government will need to borrow a cool £243 billion from the City by the end of this financial year, as it builds up a debt pile now expected to hit 1.47 trillion by 2014/15. This mountain of debt has been created by Britain’s insatiable welfare state, spending to cope with the recession, and a tax system heavily dependent on corporate profits and high-earners.

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