On Question Time on Thursday 29th January Germaine Greer made the most ridiculous suggestion that I have ever heard anyone on a Question Time panel make. You don’t have to take my word for it, you can watch the programme on BBC iPlayer The specific part of the programme starts at about the 21st minutes and the critical comment was made at about 23 minutes.
I have a high regard for Ms Greer. She talks a lot of sense most of the time, but I suspect that last Thursday she was on strong medication judging by what she said. Its the only explanation that makes any sense.
Anyway, what Germaine implied was that Greece should be allowed to default on its debts. Now let me explore that a little bit further.
Borrowing and lending is a matter of trust. My bank lends to me because it trusts me to repay. How much it trusts me is reflected in the rate of interest they charge me. If they trust me a lot they will offer me their lowest rates of interest. If they don’t trust me so much they will offer me a higher rate. It’s why payday lenders charge such high levels of interest; they expect a number of their borrowers to default and so they reduce the financial risk by charging all their borrowers more interest.
The interest rate on any loan is not something that I can negotiate. It’s set by the lender based on how much they trust me to repay.
The same applies to countries. Credit agencies such as Standard and Poor rate countries just as they rate businesses. Britain held an AAA rating for many years, it dropped to AA during the recession and has now been restored to AAA. In Europe only Germany, Switzerland, Norway and Sweden enjoy the same degree of fiscal confidence as us. What that means is that as a country we can be trusted to repay our debts.
Greece’s rating is B, the lowest of the three possible B ratings. It means that its ability to repay its debts is in serious doubt.
Of the 130 countries that have been awarded credit ratings only three have credit ratings lower than that of Greece: Jamaica, Ukraine and Venezuela. The worse the country’s credit rating the higher the rate of interest they will pay on borrowing and so the more of their tax income that goes into repaying debt. Many countries, especially in Africa, have no credit rating at all so nobody will lend them money except maybe China. They have no hope of ever getting the money back so they are pillaging minerals and other natural resources instead.
Argentina had a rating but is now classified as SD, which means that it has defaulted on significant part of its loans and therefore is unlikely to be offered credit by anyone hoping to get its money back. What has Argentina got to do with this? Everything.
Now, here’s the thing. On Question Time Germaine said that Argentina had defaulted on its debts and “got away with it”. No they haven’t because no organisation with any sort of sense will lend Argentina money until that SD rating is lifted. Where did you learn your economics, Germaine, the University of Pyongyang?
Countries, just like people, have to borrow money. Partly it’s to pay government employees and suppliers and to make welfare payments, because tax revenue can take up to two years to collect. But they also need to borrow money to pay for capital projects, such as road building, new hospitals etc. HS2, if it goes ahead, will be built with borrowed money. The taxes to pay for those sorts of projects may take years to collect but the contractors need paying as the project develops, so the government borrows. It’s standard practice and no one thinks too much about it until the economy crashes and the debts can’t be repaid. So if a government can’t borrow then it can’t fund itself. Does Germaine not understand that simple concept? Just imagine the telephone conversation:
“Hello, this is Argentina. We’d like to borrow a few billion dollars.”
“Is that the same Argentina that defaulted on its last loans?”
“Yes, that’s us.”
The alternative to borrowing is to print money, but Greece can’t do that because it is part of the Eurozone and the fiscal policy of the Eurozone is not within its control. The only way that Greece can print money is for it to leave the Euro, which would be a disaster for its economy. With massive debts and massive costs any new currency would be almost worthless, making imports cripplingly expensive. Greece relies heavily on imports. Again, defaulting on their loans won’t work because no one wants the currency of a country that can’t or won’t pay its debts. Just ask the Argentinians.
Argentina defaulted on a lot of its sovereign debt in 2002 so it can’t borrow money and instead it prints it. In 2001 the US Dollar to Argentinian Peso (ARS) exchange rate was about 1 for 1. As I write this it will cost you 8.3 ARS to buy one US Dollar. That means that everything that Argentina buys that has to be paid for in US Dollars now costs over 800% more than it did 13 years ago. There have been similar falls against all the major currencies, so paying in Yen or Euros or Pounds is no cheaper than paying in Dollars. So, Germaine, did Argentina really “get away with it”?
Argentina’s economy, although defying the forecasts of a meltdown, is once again starting to contract as high welfare spending and rampant inflation eats into its wealth. Does this sound familiar? Some economists are forecasting more debt defaults which will damage Argentina’s economy even further. In terms of inward investment it is already regarded as a pariah, according to Reuters. I wonder if the Argentinian people, struggling to keep up with prices, think that they have “got away with it”.
As an aside it is no surprise that Argentinian President Cristina Fernàdez de Kirchner is so keen to campaign for the return of Las Malvinas; it’s a good way to distract attention from the dire state of their economy.
Maybe Greece won’t default on its debts. Maybe it will just re-negotiate its schedule of repayments, but that is almost as bad. As any credit card holder knows, the longer you take to repay a debt the more you pay in interest. So Greece’s new government won’t be solving any problems, it will just be putting itself in hock for longer. It will have to spend more tax revenue on interest payments in the longer term so it will actually have less to invest in growing its economy, which is the stated aim of the new government.
But where will Greece get the money to fund this promised economic growth? With its current credit rating no financial institution worthy of the name will lend it money or buy its bonds. It can’t print money and the amount of tax it collects isn’t enough to cover current spending commitments, let alone new ones. It has to rely on the EU to lend it money and I can’t see the EU being keen to throw good money after bad. The alternative is to withdraw from the Euro and borrow from a few willing lenders such as Russia or China, and the cost of that would be far higher than mere money. No wonder the new Greek government isn’t too keen on applying fresh sanctions to Vladimir Putin.
Now, why is any of that important to us in Britain? Because if this is what some of the Left wing is thinking, then it is probably also what the Labour Party is thinking. Yes, it could happen here.
I’m not suggesting that Britain would default on its debts, but we aren’t hampered by being in the Eurozone. We could print more money to try to fund growth. In fact we have already done that, but in a very controlled manner. Everyone agrees it was controlled because if it wasn’t then our credit rating wouldn’t be AAA and our currency would be on the slide, which it isn’t. If we do too much more of that or we do it in an uncontrolled manner then the value of the pound will drop. If that happens then everything we import, from gas and oil to wheat, will shoot up in price. This will place huge demands on companies to increase wages which will make British firms uncompetitive in the export market which in turn will threaten jobs.
Do you think it can’t happen here? It has already happened.
Back in the 1967 Harold Wilson’s Labour government devalued the pound and it resulted in spiralling inflation with wages spiralling to keep up. In 1967 the rate of inflation was 2.5% but from there it started to rise, slowly at first but gradually accelerating until it peaked at 24% in 1975 and it wasn’t until 1982 that it returned to single figures and remained there. Between 1971 and 1979 the pound lost 65% of its buying power in the shops. In other words something that had cost £1 to buy in 1971 would cost £3 to buy in 1979. No one abroad wanted to buy British products because they became too expensive and companies started to close down with the consequent loss of jobs. Labour doesn’t like being reminded any of that. They prefer their political history to start in 1979.
Is that the only way the Greek financial crisis and this election result will affect the UK? No. There’s more. If Greece gets away with either renegotiating or defaulting on its debts then who might be next? Spain (BBB)? Portugal (BB)? Italy (BBB-)? Ireland (A)? All of them? With the possible exception of Ireland those countries are still deep in recession. If they also restructure their debts then it will destabilise the Euro and will slow the recovery in Europe as a whole. That has a direct impact on the UK because we trade so heavily with Europe. If they are spending less then we will sell less to them. That affects jobs right here at home. It could even put our own economy back into recession. This isn’t me talking, this is reputable economists. Yet to Germain Greer this is a mere bagatelle. It’s not real money as far as she is concerned. Maybe it isn’t real money, but its real economics, Germain, and real jobs done by real people.
Can that be avoided? Not by any of our political parties. Our only hope is to get our own debt down so that we don’t have so much interest to pay. No party is promising to clear the fiscal deficit before 2018 and possibly later, so we can’t start to repay the national debt until after that. Which means that the debt will continue to grow and more of our tax revenues will go on servicing that debt. If the Eurozone coughs, we’re going to catch pneumonia.
I have another bone to pick with another member of the Question Time panel, Peter Hain, Labour MP for Neath, over something he said. I have to confess at this point that he and Germaine Greer said so many barking mad things that they actually had me shouting at the telly, which is not something I normally do.
Peter Hain is still peddling the ridiculous lie that our fiscal deficit and national debt are all down to the banking crisis that started in 2007. Germaine Greer said much the same but she isn’t a former Labour Cabinet Minister with a degree in economics and can therefore be forgiven for getting that wrong. May I just take this opportunity to remind them both of the inconvenient facts.
In 1997 the new Labour government inherited a budget that was just about in balance. Over the next two years, as Labour followed the outgoing Tory government’s spending plans as they had promised to do, the budget was actually in surplus by a small amount. By 2007, however, Labour was running a deficit of £35 Billion. You don’t have to take my word for it, there are plenty of reliable sources for that claim. For the best part of 8 years Labour had been spending more than it was collecting in taxation, and by a significant amount.
In 1997 the national debt stood at about £300 billion. By 2007 it had risen to £400 billion, mainly as a consequence of adding the increasing deficit to the existing debt. The government spent about £65 billion on bailing out the banks (not £100 billion as stated by Peter Hain), but by 2010 had managed to double the national debt to £800 billion. In other words the government went on a spending spree and blamed it on the banks. Some of that increase was down to increases in the amount of welfare payments that resulted from job losses, but that only accounts for a tiny fraction of the £350 billion increase in debt that isn’t accounted for by the bank bail out.
As a former member of the Cabinet Peter Hain knows all this but he has either forgotten or is being deliberately misleading. Which is it Peter? Are you just forgetful or are you lying? If you are lying will you please stop insulting our intelligence.
Now, just to return to an earlier blog, on 3rd January I predicted that as part of their electioneering both the Tories and Labour would start making extravagant promises to voters in marginal constituencies in order to buy their votes with taxpayers’ money. Low and behold, this week we hear about a whole lot of spending plans that affect, you guessed it, marginal seats.
Michael Gove went to Thurrock to make an announcement, which is one of the Tory marginal that I predicted was likely to benefit. Justine Greening went to Warley, right next door to Edgbaston which is another tight marginal, and so on and so forth. In all 21 government ministers visited 19 marginal constituencies and each one had a give-away to announce. Remember, you read it here first.
So when will we hear Labour’s promises to those constituencies? I don’t think they will be long in coming.
Oh well, just 95 more days till the election. Shoot me now!
PS. After Tweeting to Peter Hain that I had mentioned him in my blog he Tweeted back suggesting I read (he meant buy of course) his book Back To The Future Of Socialism published, just by coincidence, last Monday, in which he apparently explains how it was all the bankers fault that Britain has so much debt and it was nothing to do with Labour fiscal policy. It seems you no longer have to wait for history to judge the performance of your government, you just write your own history to "prove" you were right!. No thanks Peter, if I want whitewash I'll got to B&Q.
PPS Some people never remember that when you’ve dug yourself into a deep enough hole then it’s time to stop digging. I got another Tweet from Peter Hain which was, I think, intended to “prove” that he was right and I was wrong.
Peter Hain @PeterHain 1h1 hour ago
@robert_cubitt: 'don't confuse me with the evidence' @UKLabour borrowing, debt, deficit lower before banking crisis than Tories 1997
So I Tweeted him back the link to The Guardian article that I had used as the source for this and other blogs. It shows that (a) Peter Hain was wrong, Labour’s deficit in 2007 was bigger than the Tories in 1997 and (b) that although the Tories had run up a large deficit during the previous recession they had managed to get it under control and were reducing it year on year up to the 1997 General Election. As you will recall, Gordon Brown promised to maintain Tory spending commitments for the next two years (Chancellors actually have no choice about that but it sounds good on TV) which resulted in a fiscal surplus before Labour started to get into deficit spending again, just as I said above. There was no recession at that time so no excuse for doing it. Anyway, he hasn’t Tweeted back so I guess he’s decided to let that one pass. I wonder why?