Jeremy Warner: No risk of default when inflation can do the job


Outlook I'm ever more puzzled by a note from Moody's last week suggesting that the British Government's triple-A credit rating may be in danger if after the next election firmer action than envisaged in the Budget isn't taken to bring down the fiscal deficit.

Credit ratings are meant to measure the risk of default, and if a government is borrowing in its own currency, then the chances of a sovereign nation defaulting are virtually zero. This is because if the worst comes to the worst, governments can always turn on the printing presses and honour their debts simply by expanding the money supply.

This would be very bad for the currency and inflation, but these are rather different risks than that of outright default, even though in practice they may amount to much the same thing. Inflating your way out of debt is in most respects just as dishonourable as straight default.

True enough, Britain's record on outright default is not entirely faultless. In 1932, it slashed the coupon on war loan. Though this was linked to abandoning the gold standard, it was nevertheless an act of default – a first and hopefully the last. In any case, it is not entirely clear why Moody's thinks there is a present-day risk of default. Debt raised in a foreign currency is a different matter, but there is not much of that in the mix of UK national debt. It is also a different matter for peripheral eurozone nations such as Ireland, where there is no matching ability to print money to pay off debt.

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