More words of caution from Edmund Conway in today's Telegraph:
By many yardsticks – size of annual government borrowing, severity of the credit crunch, depth of recession – Britain is in as deep, if not deeper, trouble than most of those euro members. However, financial markets, like the rest of us, find it hard to focus on more than one thing at any time. Since Greece's near-collapse, they have been fixated on a very specific problem, namely that over-indebted euro members cannot easily buy time for their economies by devaluing their currencies, because they are stuck in the straitjacket of euro membership.
As a result, countries with an independent currency have become refuges of sorts. There is a decent rationale behind this: for a start, the likelihood of our being unable or unwilling to pay back our debts is extremely slim. Britain has not defaulted on its domestic debt since Charles II refused to pay interest on some bank loans in 1672 – the "Stop of the Exchequer".
We have been able to do this because countries with their own currency and monetary policy can usually erode their debts away by generating inflation. Britain has done so on countless occasions throughout history. Markets seem to prefer this "soft" option, perhaps because it leaves a country's destiny in its hands. Moreover, the maturity of British government debt is by far the longest in the world, so we do not have to reissue it year after year. That is why Britain is due this year to issue less debt than Germany, despite the far larger size of the UK deficit.
These, for Mr Osborne, are happy accidents. But they cannot disguise other, more ugly features of the economy. While most investors have happily fixated on Britain's advantages, they have conveniently forgotten the fact that around four fifths of the Government's liabilities are linked to inflation (including both our index-linked bonds and off-balance-sheet nasties such as public sector pensions and the costs of the Private Finance Initiative). Eroding our national debt significantly without cutting back (in particular, state and public-sector pensions) would take a bout of hyperinflation, which would have all sorts of consequences.
A small band of hedge funds is now building up a series of sizeable bets on Britain defaulting. In the past few weeks, they have placed more than $3 billion worth of bets on that precise outcome in the credit default swap market. History – three centuries without default – suggests that they will be proved wrong. But these are unprecedented times. Had Britain joined the euro, it would certainly have shared Greece's fate, and would have been too big to be bailed out.
Avoiding euro membership, however, will not guarantee that Britain avoids default. We cannot afford to be smug for ever.
I recommend the whole article.
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