During the excitement of the post 2008 global financial crisis we became used to outbursts of public debate over debt at a national level. The press delighted in telling us that the Italian government would be borrowing just to pay interest if the rate reached 7%. And then we had the public airing of the Greek debt which has, temporarily, been resolved by issuing more.
More recently has been public agonising over Chinese debt problems as commercial businesses fail with musings over the potential consequences for world order. More subtle has been the emergence in the UK of acknowledgement of the link between our long term external current account deficit and the need to acquire funds from elsewhere to balance it.
The UK subject was aired on 21 March by Kristin Forbes of the Bank of England’s Monetary Policy Committee and has received more comment on the announcement of the UK’s current account deficit for 2015 (31 March 2016). As Ms Roberts notes: “A current account deficit must be financed by capital flows from abroad (a financial account surplus) – basically through investment and borrowing from foreigners.” Or as Mr Carney put it in January, relying on the “kindness of strangers”.
The UK is the second largest external borrower after the USA. Our position as an international finance hub exacerbates the numbers: the London based international lenders need to borrow to lend. We are also aggressive overseas investors. The result is that the UK owed USD 8.4 trillion at end September 2015 (Source IMF, at an exchange rate of 1.5199).
To put that in perspective, China records trade surpluses and had USD 1.5 trillion of external debt at end Q3/2015 and held about USD 3.3 trillion of foreign reserves against the UK’s USD 159 billion at January 2016.
The 2015 current account deficit figures give little comfort. Our foreign investment income is down while foreigners’ investment income from the UK remains constant, and the trade in goods remains negative, perhaps connected to our investments in commodities businesses.
We await up-to-date debt figures, but the exchange rate has now moved to 1.44. Also the IMF data records that 88% of the “Deposit Taker” external debt and 60% of the other corporate debt is repayable within a year.
Of course banks and treasurers do monitor their duration risk. We certainly hope banks also do, following the Northern Rock and BoS debacles, and so the positions can be managed should Brexit prove challenging.
Perhaps time for the UK to shake off its schadenfreude over other countries' debt concerns and to look at the home books and seek to be less reliant on the kindness of strangers.
