Wednesday, 19 August 2009

Tory leader claims UK may default on debt

Well, that's what it says in these headlines...

Daily Telegraph
Guardian

What he actually said was the UK may be unable to raise new debt or even fail to meet its obligations.

David Cameron: Tory boy

Of course a real debt default cannot happen. HMG can print as many pounds as it wants - and gilt coupons are paid in sterling.

The real problem is selling more of them after you've debauched the currency by printing. There could be a flight from sterling, or less drastically it may be necessary to raise interest rates to attract gilt buyers. (At the moment the QE programme is buying back all the gilts issued so there's little risk to the buyer.)

So why is David Cameron banging this drum at this time? Well, the next general election is now on the horizon - May 6th 2010 seems to be the popular consensus, about seven and a half months away - and "Dave" is clearly worried that this government has sprayed so much borrowed money around that they've actually bought themselves some popularity. The Tories really need the inevitable sterling crash to happen this autumn.

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