On Monday, if you accept the OECD’s figures, Britain’s public debt was 42% of GDP, or about 600 million pounds. Today, Britain’s public debt is about 142% of GDP, or about 2 trillion pounds. In one week, Britain’s debt has increased by 1.4 trillion pounds. That’s 2 trillion dollars of debt added in a single week. It’s likely the fastest, largest increase in net national indebtedness in the history of the world.
What happened? On Thursday, Britain’s Office of National Statistics ruled that the Royal Bank of Scotland and Lloyds (which had already taken over HBOS) are, thanks to the recapitalization agreements reached on October 13, now in the public sector. That is, they have been nationalized. Therefore, their liabilities belong on the national accounts.
ONS is disturbingly vague about just how large those liabilities are, noting only that the valuation process will take time. That’s undoubtedly true, but the fact that no one know for sure what the real position is shows just how bad the situation has become. But ONS did provide a tentative estimate: “the addition to Public Sector Net Debt is likely to be in the range between £1 trillion and £1.5 trillion.”
That’s not an accurate picture of the size of the banking sector’s liabilities, of course. By itself, RBS reported liabilities of 1.8 trillion pounds in June 2008. Of course, in theory, those liabilities were balanced by assets. In practice, they were not.
The implication of the ONS’s statement is that, of the about 3 trillion in reported liabilities the two banks reported in June 2008, between one-third and one-half will fall to the taxpayer. This is a shocking amount: just last month, Standard & Poor’s assumed that only 20% of Britain’s GDP was at risk. Two days ago, it appeared it might be 30%
Now, the lower bound is 70%, and the upper bound runs to about 110%. And that’s for only two banks, with 3 trillion in liabilities. Total bank liabilities reported in January 2009 were 7 trillion. If the ONS ratio applied to all those liabilities, the upper bound would be 250% of GDP.
And that’s not the worst of it. Of that 7 trillion pounds, about 4 trillion was denominated in foreign currencies. In the worst case scenario, Britain can pay off sterling debts by running the printing presses. But that does not work for debts in other currencies. This problem of foreign currency obligations was exactly what destroyed Iceland’s banks and brought the country to bankruptcy.
ONS acted correctly: it has a legal obligation to record the facts as they are. But by bringing the banks fully into Britain’s balance sheet, it has revealed just how close Britain is to a complete collapse of its national finances, and, perhaps, rendered this collapse inescapable. In these circumstances, Britain’s desire – and the U.S.’s – to go on borrowing and spending is not merely a failure to keep vital financial powder dry and in reserve. It is a dereliction of national duty.