Friday, January 23, 2009

How Much Are We In For?

This time around we may not avoid the cheap 'un

One of the most worrying aspects of the current crisis is that the government has completely lost track of its liabilities.

Of course, Brown has always relied on Enron-style fiddling to shift his debts off balance sheet (PFI, public sector pensions, etc etc - see many previous blogs), but until now we've always assumed he was simply being dishonest. We reckoned that behind the deceit he actually did know the true extent of the debt.

But now it's clear he really doesn't know. He has promised so many bail-outs and dished out so many financial guarantees - both explicit and implicit - that he has no idea what it all adds up to.

This morning on R4 Today he was asked point blank for the total by Evan Davis. He simply couldn't answer. Sure, he blustered around his usual generalities, and Davis unfortunately let him off. But the message was clear - he has lost track.

The Treasury Select Committee highlights the same concern about unquantified liabilities, and says:

"By nationalising financial institutions, the Government has taken on responsibility for significant liabilities. In order for public scrutiny to be effectively performed, the magnitude and nature of these liabilities must be comprehensively disclosed. These disclosures must be at least as comprehensive as those made by major banks and should go further then meeting the minimum acceptable accounting standards."

Spot on (even if, as Jeff Randall points out this morning, the banks themselves are hardly shining paragons in this area).

So in the absence of government figures, just how much are we in for?

The scary truth is that nobody really knows. But here are a few figures we do know about: £100bn or so for the Crock, £20bn odd for Bradford and Bingley, £500bn for October's bank bailout, £11bn odd for loans to small companies, £50bn for some other loans, various other stuff too vague to understand, and some hundreds of billions on an undefined toxic debt guarantee scheme.

Hmm. So what does that come to? £700bn? £800bn? A trillion? Your guess is as good as Gordo's.

An alternative estimate, much discussed by the Prof, starts from the other end - ie the total liabilities of the banking system, the argument being that either explicitly or implicitly, Brown has now guaranteed the whole lot.

These numbers are really scary. When last sighted (November 2008), the total liabilities of our banks summed to £7 trillion, well over four times our annual GDP. If that lot went belly up, we'd really be in the can.

Of course, those bank liabilities are supposedly backed with assets, so we shouldn't really be in the can for the whole £7 trillion. But right now, how confident can we feel about that? The financial markets are telling us the word "assets" likely conceals all manner of further horrors.

Ah well, you say, if the assets turn out not to be worth enough, HMG will simply have to default in the time honoured manner - ie by running the printing press. It will be brutal on widows and orphans, but we have at least been there before. We mapped that territory back in the 70s and it wasn't actually the end of civilisation as we knew it. Why, most of us even managed to go on eating Birds Eye beef burgers.

Yeesss... unfortunately, this time round there's a slight snag.

Because of that £7 trillion total bank liability, no less than £4 trillion - yes, £4 trillion - is foreign currency debt. And as we've blogged many times, while HMG can always default on its sterling debt by running the printing press, with foreign currency debt there is no such "easy" option. HMG never did manage to acquire that foreign currency printing press.

You know what? I'm depressing myself again.

As far as I can see, every single household in Britain could be in the can for something between £40 grand and £280 grand.

Beef burgers won't be in it - even the cheap 'uns.

It'll be economy baked beans.

No comments:

Post a Comment