martes, 17 de marzo de 2009

Will Britain go bankrupt?

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Will Britain go bankrupt?

By Associate Editor David Stevenson Mar 13, 2009


Britain: on the brink of bankruptcy

And we thought we were bearish.

A research report caused a bit of a frisson in the UK press yesterday. Apparently, British house prices could fall by as much as a further 55%. Oh, and there's a real risk that the country could go bust on top as well.

This isn't a set of forecasts from some fringe pressure group. It's a report from Numis Securities, a leading firm of analysts.

But all's not yet lost. There's still a solution, says Numis. Trouble is, it's probably too painful to have any chance of happening...

House prices could fall another 55%

As our own Dominic Frisby pointed out earlier this week, the housing bust doesn't look anywhere near over (UK house prices will plummet: look at this scary chart). That almost goes without saying. But Numis Securities reckons that house prices could fall by as much as another 55%.

How do they work that out? Well, despite the 20% or so fall in house prices from the peak, the UK house price to earnings ratio is still around 4.8. That's still way out of line with the long-run trend, of between 3.5 and 4 times. That means house prices sill have to fall another 17-39% before they reach their "fair value".

A fall of that degree would be incredibly nasty - and quite likely to happen, too. After all, yesterday's figures on mortgage approvals (i.e. loans granted to people to buy houses), were down 50% year-on-year to a record low in January, pointing to more declines in store. Yet that's not the full story.

When a bubble pops, it doesn't stop at fair value. Just as prices rocket above the norm on the way up, so they plunge way below the average on the way down. And if they over-correct to the same extent as in the 1990s (which remember, was a far less drastic recession) then prices "could fall 40-55% from current levels".

That's pretty scary, though not way out of line with what our own regular columnist, James Ferguson is expecting (see James's latest take on the UK and US housing markets: Worse to come for property markets on both sides of the Atlantic).
Could Britain go bankrupt?

But even more worrying than the state of the British housing market, is the overall state of the nation's finances. Personal debt in the UK, at nearly £1.5trillion, has overtaken annual GDP – in other words, we owe more than we produce in a single year. On top of this, company borrowings add nearly another £2 trillion to the debt pile.

But the real 'bete noire' is what the government is racking up. Numis has totted up the numbers and comes to a terrifying conclusion: underlying public debt next year will reach a staggering 282% of annual GDP.

The firm's estimate of unfunded public sector pension liabilities - that's money that the government will have to pay out in pensions but which it doesn't actually have right now - comes to almost £3trn. Add it all together, and Britain's total debt mountain will stand at over 500% of GDP by 2010.

To put this figure in context, it's far bigger than at any point in our history, including wartime. And this is our fiscal position as we go into possibly the biggest recession in living memory. It's like owing more than five times your gross income - just before you lose your job.

So what does this mean? Well, for the government, it means having to sell lots more gilts to raise funds. But that will get much tougher as the debt mountain continues to grow, which means the pound will keep falling as international faith in Britain's creditworthiness steadily drops. In turn, that will push long-term interest rates ever higher to cajole foreign investors to part with their cash. Conventional gilt prices will tumble.

This could turn into a vicious downward spiral. Eventually the UK will be unable to fund itself - and will just go bankrupt. Yes, we could print oodles more money to 'pay' the government's bills. But that road just leads to hyper-inflation, like pre-revolutionary France in 1789, the 1923 Weimar Republic - and the tragedy that is Zimbabwe today.
This problem should easily be solved - but that won't happen

So is there any hope for Britain at all? Well, in fact, "the problem looks surprisingly easy to resolve", says Numis.

'Discretionary' - i.e. not absolutely essential - spending makes up almost 45% of total household outflows. So all we have to do is cut this back to the levels of the 1992 recession - stop borrowing more money and save the stuff instead - and hey presto! - problem solved.

Of course, there's a big catch. It would take more than 10 years of this sort of medicine being administered to consumers to result in a cure. And too many people have got too used to the 'must-have-it-now' mentality to have the patience to wait until they've saved up enough to buy what they want.

Further, Gordon Brown and his colleagues - and their successors, too - would have to keep their hands in their pockets for years, and not keep splashing out even more money they haven't got on a whole procession of bailouts.

Will that happen? Fat chance. The temptation for a government trying to get re-elected to keep borrowing and spending far too much will prove much too great. What's more, there's another twist. As Fraser Nelson points out in The Spectator, our Gordon seems to have sussed out how to "tweak banking regulations to buy his crappy debt, and thereby divert the nation's savings into the Treasury's coffers".

Having been sellers of gilts for 10 years, British banks, "gripped by a mysterious sense of patriotism" have bought a net £30bn-worth in the last three months – the most since data started in 1997. While there's still some cash left in the banks' vaults, expect the government to grab what it can.

It all means that sterling assets – from houses to conventional gilts to stocks exposed mainly to the domestic economy (Are shares now yesterday's story?) – will keep crumbling.

We'll be talking about how to diversify your exposure away from sterling assets in coming issues of MoneyWeek. But as we mentioned yesterday, a good start is to buy some gold – you can find out more about it here.

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