George Osborne says unless we cuts we’ll suffer a debt default.
Paul Krugman notes the evidence does not back the argument.
Ireland has gone for austerity more than any other nation. And these, as he shows, are the margins it is paying on its debt — the higher the margin the greater the risk being perceived to be:
And then he draws contract with Spain, which has been slow to embrace austerity (and even then, gone too far, too quickly):
Note the difference?
Now tell me austerity pays.
And that markets are demanding it.
Osborne really has got this wrong.
So has Ireland.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
And UK GDP growth in the last quarter was at the fastest rate since 1999, mostly due to increased household consumption for the first quarter in two years and from companies restocking inventories. Fortunately there was little growth in government spending, yet quarterly GDP growth was just under 5% on an annualised basis. It seems the prospect of government austerity is very popular with households and industry.
@Alex
Restocking quickly comes to an end
And then VAT rises, unemployment and fear kick in – at which point even retail therapy will give no release
You really haven’t got your head round this, have you Alex?
Richard, where does Osbourne say we’ll suffer a debt default?
Would you mind using the same scale in your graphs, so that viewrs get a sense of the relative magnitude of these trends.
That 2010 Q2 figure is most likely the last hurrah of the Labour government… expect a severe slowdown, or even negative figures, in Q3 and Q4 as the Coalition’s plans to slash spending and wreck the prospects for growth become clear to all…
@Howard
Absolutely right
I am afraid you are wrong Howard. The impact of government spending was negligible in the last quarter, whereas the increases in private sector consumption reflect the rate of decline of the same going into the recessions/last election.
@Alex
Frankly only you and George Osborne could believe that
Labour were in power during the quarter, for heaven’s sake
Your fantasy knows no bounds
Richard, could you please point out Osbournes default comments?
If he really did say that then he’s a bigger idiot than we all think. And if he didn’t say that then you must be misreading something somewhere.
Because apart from a $2bn issue, the vast majority of UK gilt issuance is in GBP. As a last resort we can print money to avoid defualt, so the whole defualt issue is irrelevant.
I suspect he is alluding to the fact that if we don’t reduce the amount of debt we will find it harder to roll-over existing issues, and have to offer greater yields to shift the debt on to the market. This would be particularly true if we suffered a ratings downgrade. Obviously a higher interest burden just makes the whole thing worse.
But we are not going to suffer default. And even if we did get downgraded, we’d still find buyers for gilts…we’d just have to pay higher yields.
So either Osbourne is an idot….or you are wrong…I suspect there is an element of both!
Not my “fantasy news”, just revised figures from the ONS.
@Alex
You confuse a reported fact for causation
It must be embarrassing for you
@Greg
As with Alex, you prove your ability for pedantry Greg – and nothing else
The reality is that Cameron, Osborne (please spell his name correctly) and Clegg have continually used the spectre of Greece and the resulting claim of risk of default – whether directly or by implication – to justify their austerity
You muct be the only person not to notice
In that case – yes of course Osborne is stupid – we all know that – but so too surely are those who have not noticed the stupidity of using such a fatuous line of argument
Richard, where is the proof of these claims? You are the only person making these claims that the ConDems are saying we at risk of default.
Yes, parallels have been drawn with that of Greece and their debt problems but no one has suggested default will take place (except for yourself).
I appreciate that you are an accountant with limited knowledge of capital markets, but you don’t do yourself any favours by jumping to conclusions that are factually wrong.
Hang on a minute… aren’t the ratings which agencies like Moodys and S&P assign to sovereign debt meant to reflect risk? (I very much doubt that they do that at all well, but let’s assume for a moment they do). What’s the risk in holding sovereign debt? Presumably the risk of default.
And Osborne’s argument is that unless we cut, the UK’s debt will be downgraded, reflecting an increased likelihood of debt default.
It seems to me that Richard’s description of Osborne’s position is entirely fair.
@Greg
I guess Richard doesn’t have the time or inclination to trawl through all the ConDem statements, but they did indeed imply that they had to cut the deficit speedily to stop UK being downgraded by the rating agencies. The only reason for downgrading is the risk of default.
@Howard
and
@Carol Wilcox
Quite so
And thanks
Sorry Howard and Carol, but you are not correct.
As i’ve pointed out previously, the overwhelming majority of UK debt is GBP denominated. Therefore it would actually be impossible to default, as we could print money to repay our outstanding gilt issues. Obviously this is not a particularly clever way out of a crisis, but it does mean default is not even on the radar.
I think where the confusion arises is that the ratings agencies (S&P, Moody’s etc) give a rating to a country or a particular debt security based on the credit worthiness of the issuer. Using S&P as an example, they have 13 different levels, rannging from AAA to D (which means deafult). Many of those 13 different levels have positive/negative sub levels (such as AA- or A+).
At present, the UK has a AAA rating indicating the strongest level of credit worthiness. However, once debt levels (ie the amount of gilt issues outstanding which need to be repaid in the future) get to such high levels, the general credit worthiness is going to be questioned especially when compared to the state of the UK economy. This may lead to a reduction in credit rating, possibly by one notch.
With a reduction in credit rating comes increased borrowing costs, which I believe is what Osborne means. And he’s right, increasing our cost of debt in the current economic climate is a bad move.
Where Osborne is wrong (and I think Richard has pointed this out previously on other threads) is the movement from risky assets to safer securities due to the fears of a double dip recession has driven yields down meaning the cost of rolling over our debt has dropped. Osborne is also wrong to make too much of this point because the profile of maturing UK debt is fairly spread out (unlike some European countries) meaning we don’t need to pay back a huge amount of maturing gilts in the short term.
So we’re not at risk of default. And i’ve yet to see Osborne state that we are. I traded some Latvian bonds today, rated BB+. These bonds are currently 10 rating notches away from the UK, yet a yield of just over 5% on these bonds in Euros is not indicating any risk of default (and the Latvian government can’t print Euros should it not be able to repay the debt). Hopefully this should show some perspective, and if Osborne has said we’re at risk from default then it should show that he’s a complete idiot!
Hi Richard, did you delete my explanation?
Howard and Carol, i wrote a fairly long piece last night regarding bonds and ratings which seems to have disappeard.
However, as you’ll note at the top of the page Richard states “George Osborne says unless we cuts we’ll suffer a debt default”.
Yet Osborne doesn’t say we’ll suffer a debt default anywhere. And Richard’s interpretation is wrong.
Ah, it’s back. Apologies for the duplications!
@Greg
No
Nor do I exist to service your comments
Maybe going out with my son was more important than you
Just maybe
Although clearly not in your book
Sorry, was using a different IP so it wasn’t showing when I logged on this morning and I thought you were exercising your usual brand of “free speech” where anything you don’t agree with is edited or deleted. 🙂