Britain’s quiet default

Sometimes Donald Trump has value – he says the things other politicians would like to say, but haven’t quite got the nerve to do so. So it was this week with Puerto Rican debt. The island “owes a lot… to Wall Street”, he told a US reporter. “We’re going to have to wipe that out… You can say goodbye to that.”

The debt can’t be paid back by Puerto Rico, and the central government isn’t stepping in to cover the shortfall (“we are not going to bail out those bond holders”, said Trump’s budget chief). So it won’t be paid back. There was pushback from Wall Street (“it’s just noise”, said one analyst), but the bond market took Trump at his word. Try to sell a general obligation Puerto Rican bond with a face value of a dollar this week, and you’ll be lucky to get 33 cents for it (down from 56 in September).

All bondholders should take it as a reminder that Puerto Rico is hardly the only part of the developed world with a major debt problem, and that when debt can’t be repaid, it just won’t be. Let’s not forget (however much both major political parties want us to) that the UK still has a debt-to-GDP ratio of nearly 90%.

That’s up from around 40% before the financial crisis, and carries an annual interest bill of not far off 9% of our tax revenues (around twice our transport budget). Can we pay it all off? Of course we can’t, particularly given that every bone in the political body wants to increase rather than decrease it.

So will we default on it? Of course. Not in the same way as Puerto Rico might (by just not paying). We’ll do it via inflation – by making the money we owe worth less – but the net result will be much the same: our creditors will get back from us in real terms very significantly less than they lent us. When will you feel this inflation outside the asset markets (where it has been focused for the last few years)? According to Deutsche Bank, very soon indeed: it reckons the consumer price index has bottomed. The only way is up.

On the matter of default, you might also see where David Prosser looks at the unpleasant idea that your pension fund might default on you: the deficits of defined-benefit pension funds (the ones that pay you a set amount every year from retirement to death) are now so big that one in three members of their schemes are at risk of not getting their “guaranteed” benefits in retirement.

There are lots of good reasons not to transfer out of your defined-benefit pension – but the risk that it might not turn out to be as comfortable as you thought is a good reason to think about it.

Finally, to cheer yourself up, turn to our cover story this week to find out how you could soon (well soon-ish) be able to fly from London to New York in 29 minutes and how to invest in that possibility. This might not be the place for your precious pension cash (any more than perhaps the sovereign bond market is), but it may be an interesting place to put a small long-term bet.

  • Peter Edwards

    I don’t see how we can let inflation do the trick without the bond market bond-market and housing market causing a depression.

    keeping the show going and hoping for a miracle is the best option…

    “Finally, to cheer yourself up, turn to our cover story this week to find out how you could soon (well soon-ish) be able to fly from London to New York in 29 minutes and how to invest in that possibility.” You are not talking about SpaceX I thought they were are private company.