Project Armageddon - UK most indebted nation

Hard to believe the UK is seen as the most indebted nation according to a new study published on www.arabiamoney.net (full article below).  Prince William's recent wedding to Kate Middleton would not have helped reduce this debt pile either.

With so much having been written about Greece and the contagion effect their default would have on the global economy and global are investors ignoring the fact that the UK could default?  

The study released by brokers Tullett Prebon suggests the possibility of the UK defaulting is not being priced in to any of their assets. As investors are we becoming too relaxed around those economies that are perceived to be too big to fail?

 

http://www.arabianmoney.net/banking-finance/2011/08/28/uk-most-indebted-nation-in-the-world-reveals-new-study/

UK most indebted nation in the world reveals new study

Posted on 28 August 2011

A new study from brokers Tullett Prebon called ‘Project Armageddon’ has established the true scale of borrowing in Britain which amounts to a truly staggering £5 trillion or $8.3 trillion.

You would hardly think that reading the Sunday papers today that are monumentally self-complacent and seemingly reckon the UK light years away from Europe in terms of financial problems. Yes, they are in a far worse position.

Once pension fund liabilities and PFI contracts are included the total public debt is £2.46 trillion or 167 per cent of GDP. To that you have to add the £1.34 trillion in financial sector bailouts. The total public debt is therefore £3.6 trillion or 244 per cent of GDP or £135,000 per UK household.

Add mortgage debt

Then there is £1.2 trillion in outstanding mortgage debt and £210 billion in unsecured mortgage credit. Together public and private sector debt amounts to £5 trillion, or 340 per cent of GDP.

‘The biggest single debt increment during the period between 2002 and 2009 was mortgage borrowing, which increased £590 billion between those years,’ explains the report. ‘Many borrowers saw this as an investment, a view which was profoundly mistaken even though many policymakers and even bankers managed to delude themselves otherwise.’

Average UK property prices rose by 70 per cent in this period, until the 19 per cent fall between 2007 and 2008. But most of this private borrowing went into consumption and the public sector did exactly the same thing with its borrowing.

‘Equally worryingly, UK external debt is 400 per cent of GDP,’ notes the study. ‘Far higher than countries such as Portugal, Spain or Greece and equates to $143,000 for each man, woman and child in Britain, again far higher than in most other developed countries.’

Bankruptcy possible

The study concludes that there is ‘a very real possibility of national bankruptcy’ but it notes that financial markets are not yet pricing this into UK debt. You have to wonder how long the very low interest rates available to British national debt can persist in view of the quite obvious massive credit risk exposed by this report.

‘Project Armageddon’ is actually pretty thin on predictions as to where this debt mountain will take the UK, apart from flagging up the inadequacies of current government policies, namely that they rely on the resumption of high rates of economic growth that are impossible with 70 per cent of the economy laden with debt.

You are left to draw your own conclusions about the merits of holding sterling-denominated assets with this sword of Damocles hanging over the economy. And the investment conclusion about the UK is surely don’t go there!