March 18, 2009, 5:00 am

IS UK Going Bankrupt or Is it Just Another Witch Hunt?

by: The Financial Blogger    Category: Miscellaneous
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While I was in the middle of my RRSP season one of my reader, Clare, sent me this link (http://www.webtvhub.com/bankrupt-britain/) and ask me if I think that the UK Government was pushing UK into bankruptcy. I certainly don’t think that UK is going bankrupt, but we have here another example how media can twist our minds.

uk-going-bankruptI personally think that many individuals are benefiting from the current crisis. Some people are deeply investing in the market while stocks are low; some others are trying to get as much attention they can from the media. Saying that UK is going bankrupt for example can provide quite exposure to the world.

Why I don’t think UK is going bankrupt:

#1 Trust

As it is the case for many countries during the economic crisis, the UK government proposed an economic stimulus (this word is quite popular these days 😉 ) plan. They offered to lend a lot of money to banks, nationalize some of them and inject a ton of money in order to reinstate trust in the market. Well all those measures cost awfully a lot to the government and one day, tax payers will receive the notice.

In the meantime, the UK government is financing his economic stimulus while digging one of the biggest deficits ever seen for this country. So, some people are saying that UK is heading towards Island fatal destiny: bankruptcy. Well I don’t think it will happen simply because there are so many countries that will keep lending UK to finance their measures. The question is: Do we believe in UK’s capacity of creating growth in the future? Hell yeah! Countries such as UK and USA had proven that they can stand up during the economic turmoil and put their economy back on track.



#2 Commercial alliances

Then again, several countries are making trades with UK on a daily basis. They certainly want to make sure that UK keeps buying their products and that they have access to this market. I’m pretty sure that most countries in Euro Zone will support any Euro countries (including UK).

#3 Possibility of joining the Euro

If things really turn sour for UK, they will avoid bankruptcy by joining the Euro. They would avoid any problems related to a devaluated sterling by changing their currency to the Euro. Then again, they would also benefit from the help of other countries.

In the end, I think the resources, the technology and infrastructure in the UK will put them back on track sooner or later. I would actually be more worried about BRIC’s than “mature” countries such as UK ;-).

image source: Flickr

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Comments

Media is misleading people too much these days

Can a country even go “bankrupt”? I know they can meet the definition of a bankruptcy but there would be no consequences would there, beyond the obvious turmoil of their economy.

by: The Financial Blogger | March 18th, 2009 (7:05 pm)

Since we are already in a turmoil, what can be worse ? hahaha!

Seriously, I maybe I’m ignorant, but I don’t realize how UK can go bankrupt! If it ever happens, I’ll offer to buy them for $1… CANADIAN DOLLAR!

Yes, absolutely a country can go bankrupt, it happens when they “default” on their sovereign debt and has happened a few times lately, Argentina and Russia are the most obvious examples.

There are many consequences both short term and long term for such countries so it is not to be taken ligtly..

[…] The Financial Blogger: IS UK Going Bankrupt or Is it Just Another Witch Hunt? […]

IS: That was my question. I know a country can meet the definition of bankruptcy, but then what? What are the consequences beyond what caused the bankruptcy. For a person, you basically lose all your assets and start from zero as per bankruptcy laws.

For a country? Nobody really has legal jurisdiction so other than being looked at unfavourably by lots of countries and people, what is there?

In fact the main consequences are that countries that go bankrupt usually will still need to borrow money to keep things going. Generally, international orgs such as the IMF will step up to give loans in such discussions. However, the IMF will then require specific conditions to be met including changes in the way the government functions.

As time goes by, the country will need to finance its debt by issuing bonds and the problem is that the country will have to pay bond investors a lot more interest for them to buy those bonds because the bondholders will remember what happened and the money lost.

So the country might end up paying a few % points more on its debt for a decade or more, which will make it a lot more difficult to run the national budget.

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