Saturday, February 14, 2009


No time for a proper blog today, but it's worth just noting the Times editorial on Lloyds' shotgun marriage to HBOS. The Times says:
"The contamination of Lloyds by the problems of HBOS has secured the opposite of what the Government intended with the rescue. Instead of steadying the financial system, the merger has further undermined it...

... The Government has not only failed to stem that damage but compounded some of the errors. It sought to stem financial panic by diversifying away the business risk of HBOS. It has instead spread the financial contagion to sound institutions. The episode shows a lack of foresight, competence and financial understanding; at such vast expense for the taxpayer, it is also and increasingly a public scandal."

They've put their finger on the major risk with the entire bail-out policy. It's the risk that by shoring up our rotten banks and other over-indebted private sector entities, Brown/Darling will spread debt contagion across the sound bits of our economy as well.

The most worrying possibility is that our government will borrow and guarantee so much bad debt it undermines its own creditworthiness. As we've blogged many times, HMG's debt capacity is not infinite. It is by no means fanciful to suppose that it could end up in a very similar situation to Lloyds - hugely indebted, and sitting on a stack of acquired assets that turn out to be worth much less than it says on the tin.

And what happens then?

Yes, they can default on sterling debt by running the printing press. And since that will mainly hurt pensioners with savings, and other bourgeois types, Brown will be quite relaxed about it (in reality, future high inflation is already a done deal - which is why Tyler is in negotiation with a South African pilot he met in a pub about the possibility of an off-piste shipment of Krugerrands).

But what about all that foreign currency debt? Default on that is a lot trickier because HMG can't simply run the printing press. And when we last totted it up, our overseas debt came to 300% of GDP - or £170 grand for every single British household:

And a whole heap of that debt is denominated in foreign currency - our banks alone have £4 trillion of foreign currency denominated debt (eg see this blog).

So when Brown/Darling keep telling us there's no alternative to the bail-outs, think about the scale of the debt he's taking on. And ask yourself whether he should be quite so ready to guarantee not just High Street depositors, but also all those wholesale lenders from around the world, whose funds allowed our banks to pump up their lending so catastrophically.

Nobody would start from here, but we simply can't afford to follow Lloyds.

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