Brown's Britain is broke and creeping towards the ignominy of an IMF bail-out

Spectator, The, Dec 13, 2008 by NELSON, FRASER

Before a country has to beg the IMF for a bail-out, there are normally several clear warning signs. Its national debt needs to be vast -- say, several times its entire economic output. Next, it becomes dependent on that debt, as its government is unable to balance a budget. Then, the downfall: its currency starts to devalue rapidly, as the world begins to doubt whether this debt will be repaid. The premiums to insure it against default start to soar. The risk premiums demanded by creditors become simply unaffordable. And then: pop.

It is still highly unlikely that Britain will go to the IMF, but the highly unlikely has been happening rather a lot recently. Monday's newspapers had a full-page advertisement from a high-street bank boasting about its 'global vision and prudent long-term strategy'. Seeing Gordon Brown's leaden economic clichés used to sell mortgages is an almost Orwellian sign of a new economic order. Lord Mandelson, who railed against state bail-outs as a European commissioner, is making an actual list of companies he considers worth saving.

To judge by the newspaper headlines -- the latest being an offer to pay sacked middle-class workers to study for MBAs -- one can labour under the misapprehension that Mr Brown has stumbled across a cash geyser.

There seems to be no end to the money flowing from the Treasury at the PM's behest. Yet if the government is bailing out companies, banks and mortgage holders, who is bailing out the government? There is no clear answer to this, and it lies at the heart of the biggest single peril the Prime Minister now faces.

Mr Brown has a carefully constructed narrative: that he is just starting to draw on a large overdraft facility, and that when he is finished Britain will still be less indebted that Italy and Japan. Yet this is another of his illusions. His trick is to refer only to government debt, which is but one leg of our borrowing tripod (the other two are personal and corporate debt). As the three are never put together, the true horror story is not apparent.

Michael Saunders from Citigroup, one of the few City analysts who has been right at almost every stage of the crisis, has put the picture together and shows that Britain's external debt is a sickening 400 per cent of GDP -- by some margin the highest of any major economy. To put this into the vernacular, this country owes the world four times more than our entire annual output. Anyone wondering if Britain can repay this debt would see a Prime Minister whose road to recovery involves borrowing even more.

This point is crucial to understanding the danger that the British economy faces (and why the pound has fallen every time you open a newspaper). Britain's total 'external debt' -- what the country owes the world -- is more than twice the next highest G7 country (France, at 187 per cent of GDP). Italy's is 110 per cent. America, flagellating itself over blowing up a debt bubble, is only at 100 per cent. Japan's level is half America's.

So when David Cameron told students at the London School of Economics on Tuesday that they 'will be paying off Italian levels of debt' he did a grave disservice to the Italians.

True, they have had to endure spendthrift governments, but Italians households were not fed dangerously underpriced debt for a decade. The British public will have to pay off the debt legacy of the Brown years in higher taxes, higher prices and worse services. It will take decades.

Given that Mr Brown is working only to the timetable of the next general election, this will not concern him unduly. What will be more worrying is that, uniquely, most of Britain's debt is short-term. This broke country must somehow repay most of this debt before next Christmas. And if it can't? Then we really do get to apocalypse now: Britain losing its AAA credit rating and possibly seeking IMF bail-out because no one else will lend at anything below loan shark rates.

This takes us to the most intriguing and suspicious part of Mr Brown's bank bail-out package. Bankers who have studied the small print of the new system suspect that his real objective is to create a vast pool of lending money for his own government to gorge on.

Details of his proposed Liquidity Scheme, released in a Financial Services Authority note earlier this month, explicitly warn that 'the ability of banks to lend to parties other than the UK government might be considerably reduced'.

This statement is, of course, utterly incompatible with what Brown claims is the purpose of his bail-out scheme: helping British home-owners. Such double standards are also exemplified by the case of Northern Rock. A nationalised mortgage bank should be the perfect vehicle to offer fair-value deals to the public. Instead it is offering one of the worst rates in the market, milking those who have not been able to remortgage elsewhere.

The FSA document makes this explicit. It says that those coming off a Northern Rock fixed rate will go on to a new, punitive rate a good 1 percentage point higher than that available in the rest of the market.