Forget Spain – Britain’s debts look pretty painful too

The markets seem to have it in for Spain today. Indeed, the prospect of the euro splintering entirely is increasingly being discussed in the mainstream press.

But Britain shouldn’t get too comfortable, reckons Tim Price of PFP Wealth Management. In his Price Report newsletter, he notes that “The UK’s total debts sum to over 450% of GDP. At this level, some form of debt restructuring is almost inevitable. There are four possible ways out of the mire:

• Fast economic growth, which looks hugely implausible now.

• Belt-tightening, which so far has been the preferred choice of our coalition government.

• Currency devaluation, which is arguably already happening on the sly.

• Explicit default, such as that of Russia in 1998 or Argentina between 2002 and 2008.

“As Ireland has found to its cost, austerity in the midst of a painful debt deflation may be a lost cause. Crushing the last fragments of life out of a sickly economy is not likely to be the best method for boosting government revenues or of repaying debts. But once you start to factor in unfunded liabilities (not least, pensions) the debt burden looks even more intolerable:

 

“As this chart shows, pension liabilities make a bad problem doubly worse. Factor in the off-balance-sheet liabilities of the UK and US government, and the question becomes: how long before some form of default is inevitable?”