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February 23, 2013


James Bloodworth

Hi Chris,

Would we be able to cross-post this at Left Foot Forward by any chance? Will link back of course.

Many thanks,
James Bloodworth

Liberal Europe

You make an excellent point. In general, I agree that the markets will have seen this coming, though I would qualify things a bit when it comes to this part:

The truth is, of course, that the government's creditworthiness is impeccable, simply because - even if the worst comes to the worst - the Bank of England can print as much money as is necessary to buy gilts. There is, therefore, no chance of the government ever having to default on its obligations to borrowers, unless it chooses to do so.

You haven't mentioned the risk of inflation and the possibility of a currency crisis. There is never no chance of a default, otherwise countries with independent monetary policies would never default on their obligations to borrowers.


@ James - yup, cross-post away.

James Bloodworth

Thanks, Chris. Here we go: http://www.leftfootforward.org/2013/02/why-have-moodys-downgraded-britains-credit-rating/


Liberal Europe, there may or may not be inflation/currency risk. But that is not what rating agencies purport to measure. They just say "if you lend £x, will you get £x back when you're meant to?" What you can buy with £x doesn't come into it.

gastro george

Further to Liberal Europe, the unsaid here is that while the pundits are talking about the markets have already "priced it in", the actually market shift has been practically zero - the 10yr rate is up half a percent in the last six months, and no higher than a year ago.

Liberal Europe


At some point, if there is a sustained increase in the money supply, the effects of inflation are arguably worse than the effects of a default. When that happens, a country is very likely to restructure its debts and / or seek assistance from the IMF.

Yes, we're currently unlikely to reach that point in the UK, but it's worth reminding ourselves that Britain has in the past suffered severe inflation + currency crises (including an IMF bail-out).

Ultimately, the chances of Britain defaulting on its debts have a lot more to do with the shape of the global economy than whether or not Britain has an independent monetary policy.

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