Saturday, February 13, 2010

Mature debate on the ‘debt crisis’

The UK government is less dependent on the bond market, and less affected by a rise in borrowing costs, than other states with smaller deficits.

Governments borrow by selling bonds. These bonds pay out yields each year (the interest rate) and they have an expiry date, at which time the original capital is returned to the buyer.

So the amount of bonds a government needs to sell in any year depends on: (a) the amount of new borrowing plus (b) the amount of maturing bonds that need replacing. Longer debt maturity means that (b) will be smaller.

Stephanie Flanders notes that “the average maturity of UK sovereign debt is 14 years. In the US, it's about four years. In France and Germany it's six or seven. In Greece, it's even lower… That makes an enormous difference to the amount of gilts we need to ask the debt markets to buy in a given year.”

In 2010, the budget deficits of Germany, France and Italy will be lower than the UK’s. But in terms of the bonds to be issued this year, Germany will be needing about 386bn euros, France 454bn, Italy 393bn and the UK 279bn.

It’s still a lot, but it’s also a lot less than these other countries.

The longer maturity of UK public debt also means, as Flanders explains, that an increase in the yields payable on new bonds will have a smaller effect on the total cost of servicing national debt.

We in the UK are right to be worried about our deficit. But the idea that we face a ‘debt crisis’ notably worse than other countries looks harder to sustain.

Update 18/3: I saw this nice chart from the Economist, illustrating how much longer-dated UK gilts are than other countries’.

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