Britain's quiet default

Puerto Rico's debt default will be very public, says Merryn Somerset Webb. Expect Britain's to be more subtle.

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%.

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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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.