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BRITAIN FACES A BLOW TO ITS FINANCIAL PRIDE
By: LANDON THOMAS Jr.
c.2009 New York Times News Service
Workers laid off by the American auto parts maker Visteon protested last week on the roof of a company plant in London.
LONDON -- In the dank gloom of the factory floor that he and his fellow workers had just occupied, John Horscroft recalled a time 30 years ago when strikes and industrial unrest in Britain were everyday occurrences.
"It feels like those days again," said Horscroft, who together with 226 colleagues was laid off when a car parts factory in North London was shut down last month after its American parent company, Visteon, put three British plants into bankruptcy protection. "We are all together now, fighting for a cause."
As job losses accumulate here and the government's debt burden climbs to fight this recession's ravages, Horscroft's nostalgia has been joined by harder-edged warnings --<span style="font-weight: bold"> from no less a critic than former Prime Minister Margaret Thatcher -- that Britain's deteriorating public finances might require the government to seek aid from the International Monetary Fund, just as it did back in 1976 when the country's economy was on its knees.</span>
As unlikely as that might be, it underscores the financial bind Britain is in and it represents another humbling comedown for a country that provided the world's primary reserve currency for more than two centuries.
Speculation that Britain may once again seek IMF assistance -- and become the first major Western European country to do so during this crisis -- rests upon a crucial, uncertain assumption: that the combination of its steep debt and wounded banking sector will bring too much pressure to bear on its currency, the already wobbly pound.
The numbers are worrisome.
Britain currently runs a budget deficit of 11 percent of its gross domestic product -- compared with 13 percent forecast for the United States this year. Analysts say they expect that without severe spending cuts and tax increases, government debt will jump to 80 percent of the overall economy in the coming years, from today's level of about 40 percent, a ratio that approaches that of troubled economies like Greece and Italy.
So far, investors have been willing to finance Britain's debt at relatively low interest rates -- unlike the situation in Hungary and Latvia, whose reserves have been drained, leading them to turn to the IMF for support.
Last month a failed bond auction in London ignited some fear, but subsequent debt sales have been successful. That could change, according to Simon Johnson, the former chief economist of the IMF, if those now holding British assets lose confidence in the government's ability to pay its debts and start abandoning the pound in droves -- as they did in 1976.
Contrary to some of its troubled European partners like Ireland, Spain and Greece, Britain did not adopt the euro and is thus more vulnerable to a run on its currency. If the situation worsens, turning to the IMF may be the best alternative, Johnson said. "If you have a budget problem and a banking problem, the bottom line is that you need to make adjustments," he said. "And an IMF loan can make Britain's life easier, not harder. They may have to do it."
Johnson's views are decidedly in the minority here, and even he considers the likelihood that Britain will face such a situation remote.
Still, he and the financier George Soros -- who made $1 billion betting against the pound in 1992 and who has cautioned of a similar outcome -- have attracted considerable attention.
Their views signal a growing fear that Britain, like some other countries that spent and borrowed from abroad with abandon, might be hit with a bill that it would have trouble handling.
Ireland has a deficit of 10 percent of GDP and a banking system that is in worse shape. Greece has the largest current-account deficit in Europe at 12 percent of GDP. But Britain is the only one with its own currency to defend.
The British scoff at the idea that they might need help from the IMF.
At the Group of 20 summit meeting two weeks ago, Prime Minister Gordon Brown of Britain said his Labor government had no plans to seek any such assistance.
The 1976 IMF agreement was not only seen as a national embarrassment, it also remained a symbol of a country that, under various Labor governments, effectively lost control of the economy to militant trade unions, resulting in spiraling debts and rampant work stoppages. So it is no wonder that Brown would reject any comparison to Britain in 1976.
Kathleen Burk, a historian at University College London, one of the authors of an account of the crisis in "Goodbye, Great Britain," argued that the economic situation today might well be dire but it bore little similarity to the Britain of that period when, as she recalled, even the grave diggers were on strike.
But Britain's situation today will probably to get worse before it gets better.
"It is not that a debt of 80 percent of GDP is unsustainable," said Gemma Tetlow, an economist at the Institute for Fiscal Studies, a nonpartisan research group. "It is that without fiscal adjustments the debt could grow indefinitely to 100 percent and beyond. And the evidence suggests that the higher your debt, the more your borrowing costs increase."
Still, as the lesson of Britain's crisis in 1976 demonstrates, good intentions by themselves are not enough to offset a loss of international investor confidence.
Before the 1976 agreement, the Labor government of Prime Minister James Callaghan had already taken difficult steps to curb public wages and bring down the deficit, which at 5 percent of GDP was about half of what Britain's current gap is. But for foreign investors, fed up with years of government excess, this was not enough; they unloaded their sterling holdings, starting the run on the currency that would drive Labor into the arms of the IMF.
At the time, Callaghan delivered an assessment of Britain's finances that resonates even more today. "We have been living on borrowed time," he said. "We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candor that that option no longer exists."
Then, turning to the IMF was a final option. But now the government is expected to present an especially austere budget to avoid seeking outside aid.
"This would destroy the Labor Party," said Burk, the historian.
<span style="font-weight: bold">"It is one thing if you are Hungary or Zambia. But the idea that the United Kingdom is so weak that it cannot support itself without going to the IMF would be system-shaking."
</span>
By: LANDON THOMAS Jr.
c.2009 New York Times News Service
Workers laid off by the American auto parts maker Visteon protested last week on the roof of a company plant in London.
LONDON -- In the dank gloom of the factory floor that he and his fellow workers had just occupied, John Horscroft recalled a time 30 years ago when strikes and industrial unrest in Britain were everyday occurrences.
"It feels like those days again," said Horscroft, who together with 226 colleagues was laid off when a car parts factory in North London was shut down last month after its American parent company, Visteon, put three British plants into bankruptcy protection. "We are all together now, fighting for a cause."
As job losses accumulate here and the government's debt burden climbs to fight this recession's ravages, Horscroft's nostalgia has been joined by harder-edged warnings --<span style="font-weight: bold"> from no less a critic than former Prime Minister Margaret Thatcher -- that Britain's deteriorating public finances might require the government to seek aid from the International Monetary Fund, just as it did back in 1976 when the country's economy was on its knees.</span>
As unlikely as that might be, it underscores the financial bind Britain is in and it represents another humbling comedown for a country that provided the world's primary reserve currency for more than two centuries.
Speculation that Britain may once again seek IMF assistance -- and become the first major Western European country to do so during this crisis -- rests upon a crucial, uncertain assumption: that the combination of its steep debt and wounded banking sector will bring too much pressure to bear on its currency, the already wobbly pound.
The numbers are worrisome.
Britain currently runs a budget deficit of 11 percent of its gross domestic product -- compared with 13 percent forecast for the United States this year. Analysts say they expect that without severe spending cuts and tax increases, government debt will jump to 80 percent of the overall economy in the coming years, from today's level of about 40 percent, a ratio that approaches that of troubled economies like Greece and Italy.
So far, investors have been willing to finance Britain's debt at relatively low interest rates -- unlike the situation in Hungary and Latvia, whose reserves have been drained, leading them to turn to the IMF for support.
Last month a failed bond auction in London ignited some fear, but subsequent debt sales have been successful. That could change, according to Simon Johnson, the former chief economist of the IMF, if those now holding British assets lose confidence in the government's ability to pay its debts and start abandoning the pound in droves -- as they did in 1976.
Contrary to some of its troubled European partners like Ireland, Spain and Greece, Britain did not adopt the euro and is thus more vulnerable to a run on its currency. If the situation worsens, turning to the IMF may be the best alternative, Johnson said. "If you have a budget problem and a banking problem, the bottom line is that you need to make adjustments," he said. "And an IMF loan can make Britain's life easier, not harder. They may have to do it."
Johnson's views are decidedly in the minority here, and even he considers the likelihood that Britain will face such a situation remote.
Still, he and the financier George Soros -- who made $1 billion betting against the pound in 1992 and who has cautioned of a similar outcome -- have attracted considerable attention.
Their views signal a growing fear that Britain, like some other countries that spent and borrowed from abroad with abandon, might be hit with a bill that it would have trouble handling.
Ireland has a deficit of 10 percent of GDP and a banking system that is in worse shape. Greece has the largest current-account deficit in Europe at 12 percent of GDP. But Britain is the only one with its own currency to defend.
The British scoff at the idea that they might need help from the IMF.
At the Group of 20 summit meeting two weeks ago, Prime Minister Gordon Brown of Britain said his Labor government had no plans to seek any such assistance.
The 1976 IMF agreement was not only seen as a national embarrassment, it also remained a symbol of a country that, under various Labor governments, effectively lost control of the economy to militant trade unions, resulting in spiraling debts and rampant work stoppages. So it is no wonder that Brown would reject any comparison to Britain in 1976.
Kathleen Burk, a historian at University College London, one of the authors of an account of the crisis in "Goodbye, Great Britain," argued that the economic situation today might well be dire but it bore little similarity to the Britain of that period when, as she recalled, even the grave diggers were on strike.
But Britain's situation today will probably to get worse before it gets better.
"It is not that a debt of 80 percent of GDP is unsustainable," said Gemma Tetlow, an economist at the Institute for Fiscal Studies, a nonpartisan research group. "It is that without fiscal adjustments the debt could grow indefinitely to 100 percent and beyond. And the evidence suggests that the higher your debt, the more your borrowing costs increase."
Still, as the lesson of Britain's crisis in 1976 demonstrates, good intentions by themselves are not enough to offset a loss of international investor confidence.
Before the 1976 agreement, the Labor government of Prime Minister James Callaghan had already taken difficult steps to curb public wages and bring down the deficit, which at 5 percent of GDP was about half of what Britain's current gap is. But for foreign investors, fed up with years of government excess, this was not enough; they unloaded their sterling holdings, starting the run on the currency that would drive Labor into the arms of the IMF.
At the time, Callaghan delivered an assessment of Britain's finances that resonates even more today. "We have been living on borrowed time," he said. "We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candor that that option no longer exists."
Then, turning to the IMF was a final option. But now the government is expected to present an especially austere budget to avoid seeking outside aid.
"This would destroy the Labor Party," said Burk, the historian.
<span style="font-weight: bold">"It is one thing if you are Hungary or Zambia. But the idea that the United Kingdom is so weak that it cannot support itself without going to the IMF would be system-shaking."
</span>