This morning George Osborne claimed that Portugal provides a warning to the UK. He’s probabaly right – just not in the way he thinks he is.
Osborne seems to believe that events in Lisbon provide a rationale for his cuts package (the steepest amongst the major economies).
To listen to the Chancellor one would assume that the profligate Portuguese have been merrily spending away for the past few years and only now are being forced to adopt Osborne-style austerity measures – if only they’d had the foressight to start cutting earlier.
This is abject nonsense – here’s a Bloomberg story from six months ago:
Portugal’s economy will barely expand next year as slowing growth in Europe and austerity measures to cut the euro-region’s fourth-biggest budget deficit choke the country’s economic recovery.
At roughly the same time as Osborne was announcing his CSR Portugal adopted similarly ‘tough’ measures – a VAT rise, cuts in the public sector wage bill and cut backs in public spending. Meanwhile the Finance Minster argued that these measures would ‘restore market confidence’ and pinned his hopes of growth on an improvement in exports.
This all should eerily familiar to those following the UK economic debate over the past year.
The results of this austerity experiment are plain to see today.
The same of course occurred in Ireland – two years of ‘emergency budgets’, cuts and ‘tough measures’ have led to sky high unemployment, faltering growth and ultimately a loss of confidence by the markets.
Greece’s ‘bailout’ a year ago was similarly accompanied by the kind of austerity package that Osborne advocates in Britain. The result? One month ago it was again downgraded by the ratings agencies.
Countries around the world are implementing the kind of package Osborne is pushing ahead with domestically – the results everywhere are the same: higher unemployment, lower growth, higher debt and ultimately a loss of market confidence.
The strangest thing today is that as Portugal’s policies of VAT rises, spending cuts and hopes for export-led growth unravel Osborne is claiming it as vindication.
As Portugal moves to seek a ‘bailout’, I’m reminded of an email which was circulating around city types a few months ago, I’ve no idea if all the quotes are accurate but it feels right.
1. “Spain is not Greece.”
Elena Salgado, Spanish Finance minister, Feb. 2010
2. “Portugal is not Greece.”
The Economist, 22nd April 2010.
3. “Ireland is not in ‘Greek Territory.’”
Irish Finance Minister Brian Lenihan.
4. “Greece is not Ireland.”
George Papaconstantinou, Greek Finance minister, 8th November, 2010.
5. “Spain is neither Ireland nor Portugal.”
Elena Salgado, Spanish Finance minister, 16 November 2010.
6. “Neither Spain nor Portugal is Ireland.”
Angel Gurria, Secretary-general OECD, 18th November, 2010.
Amusing comments aside though the more serious point I want to make is that Britain is not Portugal, nor Greece, nor Ireland, nor Spain.
Leaving aside the question of having our own currency and our own central bank (even if our central bank seems set to follow the ECB in rising rates sooner rather than later), the key difference is the maturity of our debt profile.
This is an important point – and one not made often enough.
The maturity profile tells us over what period debt is due to be repaid (or refinanced) and is of huge importance. To use a household example – most people can easily understand that a debt of £20,000 that is due tomorrow is quite different to a debt of £20,000 due in a decade’s time.
The average maturity of UK government debt is currently around 14 years, much higher than most other developed countries. This is crucial, as FT Alphaville explained earlier in the week. They quoted a recent Bank of America research paper:
While governments have some control over the speed at which they (try to) reduce the deficit, and while they would hope that making the right choices delivers a lower rate of interest, they have no ability to influence the redemption profile of their existing debt. As maturing bonds need to be refinanced, a heavily front-loaded distribution profile brings with it a high risk, as any big jump in interest rates will much more swiftly translate into a higher interest burden for short-term borrowers, than for longer-term borrowers.
The UK’s longer debt profile makes it much less vulnerable to short term rises in interest rates, in sharp contrast to Portugal or Greece.
The chart below (taken from Debt Management Office data) gives some sense of how the UK’s maturity profile has changed over time.
Note the proportion of debt with a maturity over 15 years has doubled since the late 1990s.
According to the Debt Management Office, 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. Greek debt has an average maturity of just under 8 years. As I mentioned yesterday, they have about 10% of their debt coming due in the next few months.
That makes an enormous difference to the amount of gilts we need to ask the debt markets to buy in a given year. It also means that even fairly large increases in funding costs will only have a gradual effect on the cost of servicing UK debt. That burden is still lower today, as a share of total spending, than it was for most of the 1980s and 1990s.
For Greece, debt servicing costs now account for just under 12% of GDP. In the UK, it’s costing less than 3% of GDP.
I imagine over the next few days we are going to hear a lot of right wing commentators saying that ‘Portugal was forced to seek a bailout with a lower deficit than the UK’. To which the answer is ‘yes, but Portugal’s average debt maturity is 6.8 years, the UK’s is 14. That’s one reason why Portugal could only borrow at around 10% per year, whilst markets will lend to the UK at only 3.75%’.