Peter Jones: Crisis needed to force political action

EUROPE’S and America’s debt crises have one thing in common – dithering political leaders who seem incapable of facing up to the seriousness of the problem and taking action.

Much though ordinary folk like you and me have come to fear and loathe them, the financial markets may eventually force action. The problem is that if it comes to that, the crisis will be incalculably greater than was faced in 2008.

The global problem is that there is just far too much debt. Too many governments, companies and people owe far too much. If you add up all of these types of debt in the ten most developed (and most indebted) countries in the world, by 2009 these ten countries collectively owed three times more than their annual GDP. Fourteen years ago, their collective debt was only twice annual GDP. Right now, it is probably a bit more than that, perhaps about three and a quarter times GDP.

Because of recession and a relatively sudden withdrawal of lending, the global growth outlook is extremely rocky, meaning that the capacity for income growth to pay off this debt mountain does not exist. So it is inconceivable that all of the interest due on this debt will be paid, or that the principal amounts owed will be repaid, on time.

This is not just speculation, but a simple fact. And that fact is the context in which Chancellor George Osborne’s pre-budget statement today sits. The target he is aiming at is a hard-to-define one of doing enough to keep growth going (however falteringly) and convincing Britain’s lenders that it is not going to end up being one of the countries which defaults on its debts.

Britain’s government debt, though high at about 77 per cent of GDP (including bank bail-outs), and annual deficit (which adds to debt) also high at 12 per cent of GDP, is not actually the main problem. The big problem is that if you add bank debt (205 per cent of GDP), company debt (114 per cent of GDP) and household debt (99 per cent of GDP), you work out that the country as a whole is in hock to the tune of 495 per cent of GDP.

That’s right, Britain PLC owes five times more than the wealth created annually in its economy, the worst national/company/bank/household debt total in the world economy, worse even than Japan, which is historically the leader in this kind of league of financial horror.

You do not have to be a financial wizard to know that some of this vast balloon of British debt (about £7,000 billion) is going to go pop and never be recovered.

And the fact that bank debt is the biggest slice of this noxious pie explains why Mr Osborne is going to offer a guarantee, apparently of about £40 billion, in “credit easing” to underpin bank lending to smaller companies. If more bank loans start going sour, they will come under new pressure and may have to seek another government bail-out.

Though shrinking the debt balloon is obviously a necessity, economic growth to increase the resources available to do that is also needed, and fuelling that growth requires new lending to growth companies which banks, under pressure to shrink their balance sheets are proving reluctant to do.

That is a pretty tricky balancing act, made all the harder by the fact that much of British economic activity depends on trading with the eurozone and America, both of which are in dire trouble.

And as if we needed reminding, up popped the Organisation of Economic Cooperation and Development (OECD) yesterday to tell us that its experts think the eurozone is two months into six months of recession with Britain (including Scotland) heading along the same downward path.

The cause, everyone knows, is uncertainty, not just about whether some member countries of the euro currency are going to succeed or fail in dealing with their sovereign debt, but whether the euro itself will survive or disintegrate.

The doubts stem from the inability of Europe’s political leaders, particularly German Chancellor Angela Merkel, to agree on the bold steps that are needed to provide some certainty that the euro will be sufficiently propped to ensure survival. What is needed is the European Central Bank (ECB) to be the lender of last resort to troubled countries.

It rejects that idea, worrying it would let the profligate carry on their bad old ways. That hardly seems a real concern, given that austerity budgets are now being enforced throughout Europe, the much bigger concern has to be collapse of the euro.

The means of preventing that has to involve some way of converting highly risky national debt into less risky European debt. Ideas for doing that in ways which do not let the practically insolvent off the hook are around, but Mrs Merkel and the ECB seem to be dead against them.

Across the Atlantic, US President Barack Obama and Congress are equally frozen. The much trumpeted Congressional supercommittee, charged with producing ways to cut America’s deficit by $1,200bn (£775bn) over the next ten years, failed to agree anything. President Obama also failed to do the arm-twisting needed to make Democrats and Republicans agree.

That is because there is no political urgency to do anything drastic because global currency investors, fleeing the euro, are still piling into US bonds, signalling to politicians that the world still thinks the dollar is safe.

What seems to be needed to make politicians on both sides of the Atlantic take action is a big bond crisis such as that which afflicted Canada in the early 1990s. Federal and provincial debt had soared and Canadian debt was down-graded while the markets dubbed its dollar the “northern peso”, a comparison with Mexico which jolted Canadians into a fierce austerity programme.

Such an event in Europe, perhaps as soon as the end of January when Italy has to re-finance €30bn (£26bn) of debt, and America, not likely until the presidential elections later next year, seem to be the only thing that can jolt politicians into action.

But by then, the crisis will be so deep that the consequences in debt write-offs, bank failures, company collapses, household insolvencies and mass unemployment, will be quite appalling.