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Guest Commentary: UK 2012 - Investors Pay to Lend to Government While Total Debt Passes 500%

Guest Commentary: UK 2012 - Investors Pay to Lend to Government While Total Debt Passes 500%

Yohay Elam, Forex Crunch,

The UK joined the exclusive club of countries that are able to raise money at negative interest rates. On the other hand, the deleveraging process has skipped this country, despite all the austerity.

There are 4 explanations for this discrepancy. How long can it last?

Britain recently raised 700 million pounds in the markets. The yield was -0.116% – a negative interest rate. This fact is even more astonishing given the maturity of the bonds – the year 2047. 35 year bonds are quite rare.

Is this a sign of confidence in the British economy and the British government’s efforts to curb public debt? That’s a weak explanation, especially as the total debt burden continues rising.

A new research by the McKinsey Global Institute shows that the total burden of debt in the UK, including households, financial institutions, non-financial institutions and the government, rose to 507% of GDP as of Q2 2011.

Britain saw a rise in the total debt during the past crisis years, while the US saw a drop in debt, so even if the total debt began shrinking since Q2 2011, it’s still at horrendous levels.

The latest Public Sector Net Borrowing report showed another rise in the UK’s public debt, that exceeded 1 trillion pounds.

3 More Explanations

The government’s share is 81% of GDP, similar to Germany and higher than Spain. Spain’s total debt mountain is 363% of GDP, significantly lower than the UK.

1) Out of the euro-zone

But money is much cheaper for the UK. The UK isn’t in the euro-zone and managed to distance itself from the zone’s debt problems, even though its debt is far from being low. In light of the euro-zone debt crisis, Britain is a safe haven.

So safe, that it joined the exclusive club of safe havens that received negative interest rates.

2) Pound Printing

Apart from being out of the euro-zone, the Bank of England is busy in bond markets: the Asset Purchase Facility (or quantitative easing, or pound printing) is the highest in the world when compare to the size of the economy: 19% of GDP.

So, apart from directly buying bonds and lowering yields, the BOE also assures investors that investing in British bonds is a safe bet.

3) Rating Agencies

The UK continues enjoying a perfect AAA rating by all three major rating agencies. The US has a similar government debt-to-GDP ratio and a much better ratio when looking at all the debt: 279%. It already lost its perfect rating according to S&P.

France lost its perfect rating while its total debt pile is 346% of GDP. Italy has a big government debt of over 100% of GDP, but a lower total debt pile of 314% of GDP. Its rating is close to junk.

The UK is the world’s seventh largest economy. It was surpassed by Brazil during 2011 and lost its sixth place.

Yet the UK is A-OK. Why?

We are definitely “living in interesting times” as the Chinese say.

Further reading: British QE Expansion Likely in February

By Yohay Elam, Forex Crunch

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.