Duncan’s Economic Blog

Britain is not Portugal: The Importance of Debt Maturity

Posted in Uncategorized by duncanseconomicblog on April 7, 2011

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.

As Stephanie Flanders wrote last year (during the original Greek ‘bailout’):

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%’.

15 Responses

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  1. […] LIBDEM/TORY response to Portugal Debt Crisis Posted on April 7, 2011 by victorialabour Just in case you listen to the tripe being spouted by George Osbourne about how the current debt crisis in Portugal justifies his stupid cuts, please remember that Portugal has to repay it’s debt in 6 years, the UK has 14 years and therefore does not compare in anyway to Portugal. A GOOD EXPLANTION HERE […]

  2. Dave Holden said, on April 7, 2011 at 1:27 pm

    Equally I imagine over the next few days we are going to get a lot of “the UK isn’t Portugal”. I’ve posted it before but there really is no room for UK complacency.

    And what the coalition is doing http://www.telegraph.co.uk/finance/comment/jeffrandall/8404945/Not-the-devils-Budget-but-a-necessary-evil.html

    BTW I’d consider myself of the left.

  3. Tom Freeman said, on April 7, 2011 at 4:02 pm

    So I guess a more important number than the deficit as a % of GDP is the total requirement from the bond market (new borrowing plus renewing maturing bonds) as a % of GDP. On that count I presume the UK is well below Portugal.

    Are there reliable figures on that for different countries available anywhere? A chart comparing major and/or crisis-hit economies could be interesting.

  4. […] response, economics’ blogger Duncan Weldon points out that: “Portugal’s average debt maturity is 6.8 years, the UK’s is 14. That’s one reason why […]

  5. […] Duncan Weldon: Britain / Portugal – the importance of debt maturity Will Straw: Britain is not like Portugal – evidence from the OECD George Eaton: Why Britain is […]

  6. […] the moment, we pay about 3.75% interest on our government debt.  Given that inflation is running at between 4% and 5%, depending on how […]

  7. Buckskins said, on April 7, 2011 at 7:07 pm

    Besides that your all BRITISH and that makes you special right???? Isn’t that what your elite has been spoon feeding you since your Empire fell apart?

  8. Newmania said, on April 10, 2011 at 2:06 pm

    Why is Britain not like Portugal ? Because of the Conservative Party , asking a Public sector Union financed tribune to save for a rainy day is like asking a starving dog to keep a few sausages back.
    I see it this way , we have a long term fixed rate mortgage , that is indeed a handy thing in times when there is the risk of a bond market strike increasing our costs. Nonetheless the refinancing is a constant and whilst we are further , much further from melt -down , than the PIGS the cost of keeping that security is potentially higher and could have devastating consequences without tipping us into default.
    I don`t think we can afford to be within a million miles of Portugal and so to me you assurances are like someone saying look there are people in Africa that would be glad of the vile shite I just served you.

    How did you feel about that ?

  9. […] average maturity of British government debt – how long we have until it has to be paid back or refinanced – is 14 years. In […]

  10. […] Why the *type* of debt Britain owes also matters by Duncan Weldon     April 14, 2011 at 10:45 am When judging how sustainable the government’s debt position is, its crucially important to understand the importance of our debt maturity profile. […]

  11. […] When judging how sustainable the government’s debt position is, its crucially important to understand the importance of our debt maturity profile. […]

  12. […] average maturity of British government debt – how long we have until it has to be paid back or refinanced – is 14 years. In […]

  13. […] look at this one. The government is currently paying around 3.75% interest on its debt. That’s very low. This is, of course, no surprise. As the rest of the […]

  14. PM said, on May 16, 2011 at 3:29 pm

    Good Blog. In America we essentially transferred all interest rate and refinance risk from the private finance sector to the FED, and thereby to the public sector. This was done to prevent the stagflation of the 1930s, we are told, and this matches with the FED chairs expertise. So far this has worked for America, although the end game is not finished. However, looking in from the outside, I don’t understand how the ECB thinks that it can take a short term patch work approach in a world where IB’s and Hedge Funds leverage up Trillions of $ in fire power to bet against such moves. Would it not make more sense to provide longer term funding, lets say 10 year bonds, at very low initial interest rates such Greece could pay back a large portion of current creditors, reduce debt service to well under 10%, and increase average maturity to near 10 years.
    Obviously, this requires the EU tax payer to essentially bail out creditors, but they will do this either as a whole or separately in any case – unless the Germans and French are willing to risk a private banking system melt down – think BNP. Make the initial refinaced rate extremely low and have the rates automatically adjust upward if specific goals are not met. This would help all sides.


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