Reply to: Debt and the Germans

[Doggy Styles]

An investor that lent the UK government 1,000 USD or 1,000 EUR 5 years ago would only receive back around 700 USD or 700 EUR today. The UK government has intentionally manipulated the value of sterling for exactly this reason, hence many would argue it has defaulted and continues to default on it's debts.

It still isn't a default.

We can speculate about currency manipulation, all nations do it but that's still playing within the rules. A default isn't, and that's why markets punish it.

[d000hg]

An investor that lent the UK government 1,000 USD or 1,000 EUR 5 years ago would only receive back around 700 USD or 700 EUR today. The UK government has intentionally manipulated the value of sterling for exactly this reason, hence many would argue it has defaulted and continues to default on it's debts.

'Many' would predominantly be populated with those who don't know what words like 'default' and 'recession' mean.

[bingobob]

Not likely. Britain did the same in the 70s and wasn't penalised by the markets. In hard times political stability is valued as much as economic.
That's also why loads of rich Southern Europeans are buying property in London now

That's a relief, we 'did it' in the 70's so it will all be fine now (any particular part of the 70's or was Britain just crazily 'doing it' for a decade).

Thanks for the insight anyway, have you thought about writing a book?

[sasguru]

Of course, but the important thing to bear in mind is that the UK government chose to devalue it's currency, it was not market forces as such. How do you think the money markets will react when the UK renegotiates it's debt in 2017? Either the UK will have to strengthen it's currency (which will meaning sharply raising interest rates and contracting the money supply) or fx risk (past and future) will simply be priced in and the UK government will be bankrupt within days.

Not likely. Britain did the same in the 70s and wasn't penalised by the markets. In hard times political stability is valued as much as economic.
That's also why loads of rich Southern Europeans are buying property in London now

[bingobob]

Are there any UK bonds denominated in EUR or USD? I'm not sure there is.

If someone has exchanged currency to invest in GBP denominated bonds then they have assumed the FX risk for themselves, which is hardly the fault of the British government.

Of course, but the important thing to bear in mind is that the UK government chose to devalue it's currency, it was not market forces as such. How do you think the money markets will react when the UK renegotiates it's debt in 2017? Either the UK will have to strengthen it's currency (which will meaning sharply raising interest rates and contracting the money supply) or fx risk (past and future) will simply be priced in and the UK government will be bankrupt within days.

[doodab]

An investor that lent the UK government 1,000 USD or 1,000 EUR 5 years ago would only receive back around 700 USD or 700 EUR today. The UK government has intentionally manipulated the value of sterling for exactly this reason, hence many would argue it has defaulted and continues to default on it's debts.

Are there any UK bonds denominated in EUR or USD? I'm not sure there is.

If someone has exchanged currency to invest in GBP denominated bonds then they have assumed the FX risk for themselves, which is hardly the fault of the British government.

[sasguru]

An investor that lent the UK government 1,000 USD or 1,000 EUR 5 years ago would only receive back around 700 USD or 700 EUR today. The UK government has intentionally manipulated the value of sterling for exactly this reason, hence many would argue it has defaulted and continues to default on it's debts.

Strangely enough though, British bonds are amongst the most popular after German and US ones.

[bingobob]

On what basis would anyone argue that? As far as I know the UK isn't defaulting at all.

Defaulting and increasing debt by running a deficit are two very different things.

An investor that lent the UK government 1,000 USD or 1,000 EUR 5 years ago would only receive back around 700 USD or 700 EUR today. The UK government has intentionally manipulated the value of sterling for exactly this reason, hence many would argue it has defaulted and continues to default on it's debts.

[Doggy Styles]

Many would argue the UK is defaulting on it's debts right now.

On what basis would anyone argue that? As far as I know the UK isn't defaulting at all.

Defaulting and increasing debt by running a deficit are two very different things.

[bingobob]

That's why the markets like the UK, it's never defaulted AFAIK.

Many would argue the UK is defaulting on it's debts right now.

England has defaulted on three occasions, although the last time was 1594 so maybe it's been forgotten about now. Germany has defaulted five times since the 1600's (including twice in the last hundred years), ironically enough the same number of times as Greece.

[sasguru]

That's why the markets like the UK, it's never defaulted AFAIK.

[Arturo Bassick]

I think GB is the only country that paid back its war debts!

[sasguru]

They've got away with murder. Literally.

[gingerjedi]

Theree seems to be a popular notion that somehow the Germans are very prudent when it comes to borrowing but is that really he case ?

From todays Guardian online


Albrecht Ritschl, an economics professor at the London School of Economics, argues the Germans have no claim on the higher moral ground.


He points out that Germany ran up the largest debts of any nation during the 20th century in pursuit of its ambitions and was forgiven almost all of them.

Two post-war deals, one in 1948 and another in 1953 wrote off most of Germany's debts from the two world wars and 1930s depression and delayed the remainder for almost 40 years.

In 1990, when war loans were on the agenda again, the newly reconstituted German nation said it had no relationship with Imperial Germany of the 1920s, 1930s, and 1940s and therefore owed nothing. An agreement with the US and UK allowed Germany to wriggle free with a near 100% haircut on the last debts.

Last year year it paid the last tiny amounts of leftover war loan

According to Ritschl, Germany in 1953 was "like Argentina on steroids".


There is a history in Germany of high debts and not knowing what to do about them, which means it cannot lecture other countries without denying its past.

No wonder they don't like taking about ze war.

[sasguru]

True. Their current GDP/debt ratio isn't very good either.