Saturday, 28 February 2009

The banking crisis is over, the fiscal crisis is about to begin

The UK government wants to borrow ₤120 billion during fiscal year 2009-10. That means the government needs to flog ₤10 billion worth of new government bonds every single month. It is a tall order. As this borrowing binge gathers momentum, it will be hard to keep interest rates low on government bonds.

However, the deficit is not the only financial problem facing the government. Brown and Darling offered virtually unlimited backing to the largely insolvent UK banking behemoths. Public sector debt levels are now rising dramatically. In the short run, this has prevented a full blown banking crisis. In the long run, it has put the financial viability of the government in doubt.

The banking crisis may be over; a new crisis is about to hit us; a fiscal crisis, where the government has difficulty financing its deficit and covering the growing losses of the now nationalized banking sector.


Anonymous said...

"The UK government wants to borrow ₤120 billion during fiscal year 2009-10. That means the government needs to flog ₤100 million worth of new government bonds every single month."

Apologies if I'm missing something here, but shouldn't that be £10 billion every month (120/12), so about £330m every single day?

Alice Cook said...
This comment has been removed by the author.
Alice Cook said...

What would I do without my old friend Anonymous, who finds and corrects all my typos.

Thanks for spotting that.


Anonymous said...

Now it reads £10 million instead of £10 billion :)

Anonymous said...

yep, Brown has nationalised the need to repudiate debt. Bloody brilliant! I hope that it kills the Labour Party off. Let's get back to Whigs vs Tories.

Alice Cook said...

Anonymous, I've just corrected it a second time. I think I am getting there.


Anonymous said...

Now think of the US having to raise new money of $1.75 trillion or $145.8 billion a month. And of course these amounts do not reflect any maturing debt that has to be rolled over in addition.

Now think of every country that is trying to spend its way out of this mess by borrowed money and there is going to be a lot of crowding out in the debt markets.

Very scary...

Anonymous said...

I think the change will come when corporate debt looks safer than government debt. That already looks like it has happened with McDonald's bonds and UK bonds as the risk of default was lower for McDonald's.

After Alice's Burger king experience last week, maybe this is where she is investing all her money.

Anonymous said...

Interesting article.
Thanks for posting ;-)

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