UK overseas debt scare

Fraser Nelson is trying to scare us by pointing out that the UK’s external debt is equivalent to 400% of our GDP.
Actually, on the most obvious measure, he understates the true amount. National Statistics say our external liabilities were £6.7 trillion in Q2 - 461% of our annualized GDP. (Tables D and K of this pdf).
What he doesn’t say is that our overseas assets are also big. They‘re £6.4 trillion. So our net overseas liabilities are just £309.4bn, 21.2% of annualized GDP. This is largely a reflection of the fact that we've been running  small current account deficits for ages.
Our huge gross assets and liabilities, to a large extent, reflect the UK’s position as a financial centre. If a UK bank  swaps with, say, a German a fixed-rate loan for a floating rate one, UK assets and liabilities vis-à-vis Germany both rise by the same amount. Because the UK does more of this sort of thing than other countries, so our overseas assets and liabilities are disproportionately big relative to other countries.
Granted, the financial crisis will shrink this activity - it‘s already begun to do so. But that hits both sides of the balance sheet. It’s not obvious this is a problem.
Nor is it obvious that we’re paying a lot for our external debt. In Q2 we actually had a small surplus (£3.4bn) on net investment income, as our assets yielded more than our liabilities. (Capital gains and losses aren’t included in those numbers).
And in some senses, big overseas assets and liabilities are just what we need. As Fraser says, with sterling falling it’s a good idea to have foreign assets (though in practice I suspect our foreign currency assets are largely matched by foreign currency borrowing).
What’s more, overseas assets are a sensible way of diversifying out of the UK. If our economy really is in as bad a shape as Fraser and his allies thinks, he should be welcoming this. 
So no, Fraser, our huge overseas debt is not a problem, except insofar as it’s a symptom of the size of the UK’s financial sector. 

Comments

[Mark Wadsworth]

Thanks for clearing that up. The headline figure did strike me as being complete nonsense.

[JimH]

But the assets and liabilities aren't necessarily owned by the same people. Its a bit like saying that in a street of houses the average net borrowing per household is £20K. Not too bad. Manageable. But that hides the fact that a third of the houses have no debt plus some savings, some have a small mortgage,some have medium mortages, and some have big mortgages and loads of credit card debt too. The heavily indebted ones are in trouble, and the ones with savings won't be bailing them out.
So if that amount of debt is due within a year, there are good odds that it will be unequally distributed, and many companies will be in trouble when they can't roll loans over. Which is why 2009 is going to make 2008 look like a cakewalk, economically speaking.

[kinglear]

Jim H I agree - 2009 is going to be a serious strain on even rich people with cash, never mind the bulk of us trying to keep our heads above water.
And Chris, the problem is as you say. Never forget Jim Slater's famous " minus millionaire" status - as he said in his biography it was more like assets £2million liabilities £3million, and he was able to trade out the position. What he did have, though, was an understanding bank manager who helped. Will our ie UKs creditors be as helpful?

[Bob B]

In case readers missed it, Sam Brittan made an interesting historical comparison for the scale of Britain's public sector debt when SuperMac Macmillan was Chancellor of the Exechequer and the recent Pre Budget Report:

"Those alarmed by UK official projections showing public sector net debt climbing from 36 per cent of gross domestic product last year to 57 per cent in 2012 should bone up on their history. There are long passages in Macaulay showing how the nation prospered despite increases in the national debt - regarded by sages as catastrophic. In his one and only Budget speech, Harold Macmillan noted how the national debt had risen from £600m in 1914 to £8.4bn in 1939 and £27bn in 1956 - representing 27, 133 and 146 per cent of GDP. As Macmillan put it: 'Whatever the temporary difficulties from trying to run too fast, if we stand still, we are lost.'"
[Financial Times on 5 December 2008: Sam Brittan: A framework for economic stability]
http://www.samuelbrittan.co.uk/text324_p.html

For international comparisons of projected outstanding Government debt as a percentage of GDP in 2009, try Table 1 in the Lloyds TSB Economic Weekly report of 26 November:
http://www.fxstreet.com/fundamental/analysis-reports/economics-weekly/2008-11-25.html

Britain's government debt as a percentage of GDP compares favourably with that of Germany, the US and the average for OECD countries.

So much for George Osborne's hysteria - the usual trash stuff.

Evidently, Herr Steinbrueck isn't too clued up about Germany's worrying government debt levels.

[Bob B]

Try Paul Krugman on whether Gordon saved the world:
http://www.iht.com/articles/2008/10/13/opinion/edkrugman.php

For readers who might have missed the news from earlier this year, Paul Krugman is the latest Nobel laureate in economics:
http://news.bbc.co.uk/1/hi/world/americas/7667190.stm

OK, I admit he's a bit of an anglophile, drops in over here quite often and that his wife comes from Britain.

[Mark Thyme]

Fair point Chris, but weren't Iceland's liabilities matched by their overseas assets and, indeed, their overall position was currency neutral? The wee little problem they encountered was they couldn't liquidate these foreign assets when they needed to.

[Alex]

Further, it has been and still is the explicit policy of Fraser's party to have a current account deficit, consequently a big financial sector, and a huge mortgage business. Not coincidentally, all the elements of this include significant donors to that party.

[robert]

isn't there a flaw in some of these arguments.

If we have ~$10trl in debt that's always 10trln plus interest.

If we have 10trln in assets then they could be worth 5trln in a deflated economy. If the rate of return on those assets does not keep pace with the interest on our loans we are snookered.

Now a conjecture. I would like someone to show me that the a large chunk of the debt is not foreign investment in UK banks who then lent the money to house buyers. Otherwise, where did all the new 'wealth' come from? If I am right then house price falls and a slowing economy signal the collapse of sterling.

[Mourtaza]

Quick calculations:

Mid-2008: UK owes 460% of GDP to overseas and owns 440% in overseas assets, so far so good you have a NET position of -21% of GDP:

Suppose now UK investors take a 10% loss on their assets, you are at 396% GDP in assets (since 08Q2, it is a conservative proxy)

Now on the debt side, assume 50% is on foreign currencies, which gained 20% against GBP, the debt is now 512% of GDP.

So in a year's time, UK NET external position went from 21% to 116%! (=512-396). A VERY different picture, isn't it?

You may tell me that I have to account for FX gain in my assets, but I would argue that -10% y/y performance is already overestimating current losses on UK external holdings.

To give the debt speed limit, just remember that Germany 1920's unbereable reparations amounted to 200% GDP...