Jeremy Warner: McDonald's has better credit rating than Britain

Wednesday 10 December 2008 01:00
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Outlook The market never lies. Britain is more likely to go bust than McDonald's and Coca-Cola, if spreads on "credit default swaps" (CDSs), which measure the cost of insuring debt against the risk of default, are anything to go by. As our graphic on page 37 shows, some time towards the end of September, or about the same time as Bradford & Bingley was nationalised, the cost of insuring British Government debt against default became more expensive than that of a number of leading American companies.

CDSs are a relatively new and illiquid derivative market and don't necessarily offer a reliable view of the underlying risks of various forms of debt. A possibly truer guide is the cost of raising debt, and for that the price to the UK Government is still a lot lower than any corporate. Even apparently entirely recession-proof companies with market-leading positions are having to pay at least 400 basis points above bank rate for new money right now, while the UK Government can get away with around half that.

Even so, the reversal in CDS spreads plainly means something, and may lend support to claims by David Cameron yesterday that the Government is already borrowing more than the markets will tolerate. Britain has never defaulted on its debts, or not in recent history anyway, but countries do go bust and the UK has been perilously close to it on a number of occasions over the past century.

In Japan during the 1990s, Toyota was briefly able to borrow at a lower rate than the Japanese government because of fears that Japan was borrowing so much that it no longer had a tax base large enough to underwrite its debts. In such circumstances, big international companies come to be seen as more creditworthy, as their geographic spread offers perceived protection from the travails of individual economies.

With Britain, a similar concern, already apparent in the ever-devaluing pound, may be starting to emerge. Never mind the existing fiscal deficit, which is already monstrous enough, if the Government were forced into outright nationalisation of the banks, the liabilities would swamp the capacity of the tax system to pay.

The risk of default is remote, but the CDS market is taking no chances. The perhaps more potent worry is that the Government is mortgaging Britain's future in a possibly pointless attempt to reflate an economy which in truth requires a cathartic period of adjustment after the long credit-fuelled boom.

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