Britain pays off final instalment of US loan - after 61 years

Philip Thornton
Friday 29 December 2006 01:02 GMT

Britain will today make the final payment on a multi-billion-dollar loan it took out in 1945 to refinance the country in the wake of the Second World War.

In a transaction that will draw the curtain on the devastating economic consequences of the bloodiest conflict in modern history, the Treasury will transfer £43m to the US and £12m to Canada.

The original loan of $4.34bn - equivalent to £27bn today - was made to avert Britain from bankruptcy at the end of the war rather than to finance the combat itself.

The Government hailed the repayment as a sign that the UK repays its debts - although the reality is that Britain has a patchy record on debt repayments.

Ed Balls, the Economic Secretary to the Treasury, said: "This week we finally honour in full our commitments to the US and Canada for the support they gave us 60 years ago.

"It was vital support which helped Britain defeat Nazi Germany and secure peace and prosperity in the postwar period. We honour our commitments to them now as they honoured their commitments to us all those years ago."

The loan was to be paid off in 50 annual repayments starting in 1950, but today's payment comes six years late.

The Government deferred six instalments - in 1956, 1957, 1964, 1965, 1968 and 1976 - on the grounds that international exchange-rate conditions and the UK's foreign currency reserves made payments in those years impractical.

There are still First World War debts owed to, and by, Britain. However, since a moratorium on all war debts was agreed at the height of the Great Depression in 1931, no debt repayments have been made to, or received from, other nations since 1934.

The Treasury points out that, at the time of the moratorium, Britain was owed more in war debt by other countries than it owed to America. In 1946, Britain's national debt stood at about 250 per cent of GDP. Today the comparable figure is 36.8 per cent.

Either way, the vast amount of finance from the US was vital for both the war effort and the subsequent reconstruction of Britain's bombed cities.

The funding began as the lend-lease programme under which the US in effect donated equipment for the war effort, but required anything left over at the end of hostilities to be paid for.

When President Harry S Truman cancelled lend-lease in September 1945, the outstanding supplies including some in transit were paid for at a rate of 10 pence in the pound.

This was converted into a loan facility of $586m while the White House extended a further $3.75bn line of credit. The terms of the loan looked very generous in retrospect with the rate of interest set at the 1945 level of 2 per cent.

However, the UK was not alone in seeking huge loans in the second half of the 20th century. The US showed similar generosity to both the victors and the vanquished in the wake of the Second World War. Under the Marshall Plan, it provided $13bn of economic and technical assistance over the four years to 1951.

It was not the last timeLondon had to look West for a bailout. In 1976, the UK borrowed £2.3bn from the Washington-based International Monetary Fund after a slump in the pound threatened to turn into a crisis.

In 1997, the IMF offered a $96bn package of loans for the east Asia countries hit by a currency crisis, although the conditions attached to the loans left a legacy of bitterness. As the impact of the crisis spread, the IMF was again forced to step in with a $42bn loan to Brazil. It also lent money to Argentina, which eventually defaulted on its $93bn of public debt.

Meanwhile in September 1998, the Federal Reserve Bank of New York stepped in after the collapse of the US hedge fund Long Term Capital Management to organise a bailout of $3.63bn by the major creditors to avoid a wider collapse in the financial markets.

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