US serial investor and commodities strategist Jim Rogers was asked a few months ago what should a young British man or woman do to get through the next few years of economic slowdown. Move to China and learn Chinese, was his abrupt reply.
Rogers is among a growing band of British economic bears who believe the game is up for Britain Inc. He goes one step further and says the country is eventually going to go bankrupt as North Sea oil runs out and it drowns in an ocean of public debt, much of its caused by bank bailouts and a public spending splurge driven by Prime Minister Gordon Brown. George Soros has said he expects Britain to need IMF assistance in either 2009, or at the latest 2010.
Unfortunately for Rogers and Soros, England last went bankrupt in the 1600s and Britain managed to stay solvent even after World War II, admittedly with some help from the US treasury via the Washington Loan agreement.
Nevertheless there are chilling parallels for British economists to the 1970s when the UK was famously described as the "sick man of Europe''. During that decade the Wall Street Journal hoisted the powerful headline "Goodbye, Great Britain'' and James Callaghan was forced to go to the IMF in 1976 to help with a sterling currency crisis. He managed to pick up a loan of £2.3bn and eventually the crisis abated, even though appalling industrial-relations strife did not.
In those days, a plunging currency put politicians under pressure; now a devaluation is greeted with joy by UK economic commentators who are happy to see British exports, anaemic as they are, given a currency booster. In one of the most extraordinary episodes of economic complacency probably ever witnessed in UK history, there has been barely a questioning peep from UK economic commentators about the performance of sterling in the last year.
The figures are worth rehearsing here one more time. Last year the British pound was the worst-performing currency in the world, except for the South African rand. Sterling declined by an extraordinary 26% against the dollar and 23% versus the euro. This spelt appalling pain for Irish exporters of course.
Clearly the sharp falls in sterling have curbed the worst effects of the recession on Britain which will only contract by 3.7% this year, which seems innocuous when placed alongside the plunge in Ireland's economy where a contraction of at least 8% is on the cards.
But despite endless hoopla and cheerleading over what is an effective devaluation of the British pound, British economic opinion eventually must come around to face the reality that sterling has fallen off a cliff because outsiders remain worried about a plethora of economic challenges facing Gordon Brown and Alistair Darling, with the latter unveiling a crucial British budget this week.
Among those challenges is the rising level of debt. The UK is likely to have a debt-GDP ratio of 80% in the not-too distant future and it could easily rise to 100% shortly after that. Ireland's is following a very similar trajectory. Interestingly the UK budget deficit for 2009 is likely to come in at 9.5%, with Ireland pencilled in, according to NCB, at 10.8%.
In other words, in terms of current budgetary shortfalls and in terms of overall debt levels as a percentage of national income, there is barely a cigarette paper separating the two countries, regardless of the euro or sterling.
The collapse in sterling is obviously closely connected to falling interest rates in Britain, but that is not the full explanation. There is also the debt concern and the potential for inflation as the UK takes a different route with quantitative easing, which has been shunned so far by the eurozone.
Many in the market fear the long-term ability of the British government, a Labour government, to get on top of the mountain of debt and many of these people are selling off their sterling holdings. The rapid fall in sterling, while it boosts exports, still leaves Britain with a problem.
The country has been dismantling its manufacturing base over the last 20 years and turning itself into a giant bank or hedge fund in the process, particularly in the capital city. It's quite an extraordinary statistic, but only 6% of the workforce of London actually makes anything. Almost 20% of employment is in financial services and wrapping up CDOs or SIVs doesn't count as manufacturing as far as statisticians are concerned.
These statistics matter because the so-called "life saver'' of depreciating sterling is partly offset by people not being able to find locally produced alternative goods they can buy, because UK Plc no longer chooses to make them. So instead sterling is falling, but consumers are still forced to buy imports – albeit dearer ones – because the UK has run down its manufacturing base. Imports only fell 0.3% in April for instance.
Jonathan Loynes, chief UK economist at Capital Economics recently said: "There is still not much indication that currency weakness is boosting exports in any meaningful way."
The other concern is the sheer scale of the UK's bank liabilities which amount to 4.7 times the GDP of the country. Ireland's bank liabilities in comparison are about 250% of GDP, but as one observer remarked recently, "it's not the size of the liabilities that's important, but whether they come due or not".
While Ireland and the UK line up in similar positions in so many areas (debt to GDP, budget deficits, banking liabilities, public-spending pressures), that is where the similarities end as far as foreign lenders are concerned.
Last week the yield on a benchmark UK gilt was 3.23%; for Irish bonds it was 5.26% – a staggering difference or spread of over 2%.
The credit default swap market, with all its health warnings, was telling a similar story. It cost $82,000 to insure $10m of UK government gilts over three years; for Irish bonds it cost $206,645 to insure $10m of Irish government paper over the same period.
The appalling gap in Ireland's revenues and its expenditures cannot be the only reason for such stark differences with Britain on the bond market. Obviously scale is crucial too.
The UK has a population of approximately 60 million people; Ireland has about 4.2 million. That seems to be playing heavily on the minds of bond strategists. Also the ability of the UK to retain foreign capital flows, due to the City of London, is also an advantage, even though its interest rates are currently rock bottom.
Still, the Irish/UK bond spread is hard to justify. It's not so much that the Irish ones should be narrower, more that the UK ones should be wider. Obviously the UK has a far more liquid market for gilts to trade on and this is also likely to be a factor.
But ultimately the tax-raising powers of the British exchequer, which it can yield over 60 million people, is the crucial difference and there is nothing the Irish government can do about that.
In The British Corner...
Brown is regarded as culpable for the failures of British bank regulation
Size of the economy: GDP of £2.1tn
Budget deficit: 9.5% of GDP in 2009, according to the IMF.
Strengths: Has a very strong exporting economy thanks to recent falls in sterling. London is the dominant financial centre in Europe and arguably second only to New York globally. The economy is still AAA by all three ratings agencies and its bonds trade at levels similar to rock solid Germany. The country has also committed itself to a significant stiumlus plan and is refusing to substantially reduce capital spending, which will help limit employment losses. The country managed to stay solvent after WW2.
Weaknesses: Has been slowly hollowing out its manufacturing sector for years, forcing it to import a large amount of its goods compared to Germany and France. Has the largest dependence on financial services of any European major country. Will have the largest budget deficit of any top seven world economy in 2009.
Outlook: Mixed, things are likely to get rough, but a default or an IMF application is unthinkable.
In The Irish Corner...
Brian Cowen was Minister for Finance when Ireland was inflating one of the biggest property bubbles in the world.
Size of the economy: GDP of €180bn.
Budget deficit: 10.8% of GDP in 2009 according to NCB Stockbrokers.
Strengths: A young expanding population and a low corporation tax rate of 12.5%. Comes into the downturn with relatively low levels of debt:GDP. Excluding the banks, the debt:GDP in 2009 will be 59.2%, well below EU averages. Heavily export dependent which means when global recovery comes it should benefit more than most.
Weaknesses: Massive hole in the public finances and no chance to devalue its currency. Has lost its AAA status from two of three credit rating agencies. Ultimate cost of bank liabilities still unknown. Pay levels still out of line with comparable European economies. Danger of deflationary spiral.
Outlook: Grim. Still able to borrow, but rising cost of interst bill is a major concern. Raising taxes could lead to massive delfationary spiral.