Coffee House

The true extent of Britain’s debt

10 December 2008

How much is Britain’s true national debt? Gordon Brown says 37% of GDP, the ONS says 43% of GDP – but this is just government debt. The reason Britain is in so much trouble is that our corporate and household debts are huge. It is the combination that makes us such a credit liability – but no one has ever put together a combination.

Until now.

Michael Saunders from CitiGroup has calculated ‘external debt’ – ie, what Britain owes the rest of the world. It is not 40% but 400% of GDP, the highest in the G7 by some margin. The next down, France, is 176%. America, flagellating itself for blowing such a debt bubble, is just 100%. Japan is about half America. The below graph shows ‘external debt’ – both in mid-2008, and five years ago.

G7 Countries – external gross debt/GDP ratios, 2003Q2 – 2008 Q2


Narrow it down to short-term debt, ie IOUs that have to be paid back within a year, and the picture grows even bleaker. It adds up to 300% of GDP – six times that of France whose loans are long-term. Saunders says, with some understatement, that this makes “the UK economy and financial system highly vulnerable when, as now, global banking and capital flows dries up.” Here is the picture, narrowed down to short- term debt (ie, due by next Christmas).

G7 Countries – ratios of short-term external gross debt/GDP, 2003Q2 – 2008 Q2

I believe that an IMF bailout is highly unlikely. But the highly unlikely has been happening rather a lot lately. There is a fairly clear apocalypse scenario emerging: that Britain becomes reliant on new borrowing, that the Arabs/Chinese get sick of buying IOU notes in devaluing sterling, and refuse to buy more debt at anything other than loan shark rates. Then Britain has to go to the IMF. For a country with as much short-term debt requirements as Britain, there is nothing fantastical about this.

Financing Britain is an issue. Our creditors will be looking at Britain with its 400% debt/GDP ratio and ask how this island country with its mammoth trade deficit is going to pay the money back, especially if its Prime Minister prescribes more debt as the solution.

But this crisis has taught us to pay heed to the highly unlikely, to watch out for the Black Swans. It could come in the form of UK banks being unable to raise capital from the markets, from liquidity issues in UK gilts, whatever.

P.S. To answer CoffeeHousers’ query, this is "external debt" by the IMF definition, which is gross. (And does not include contingent liability, just debt). One must take into account that Britain is likely to have proportionately greater foreign assets whose value would be amplified by sterling’s plunge. But how much greater? I’ll keep hunting. Every crisis is different, and each has its own metrics. It was our concentration on the metrics of the last crisis (inflation) that blinded so many to the causes of this crisis (debt).

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  • georgie

    3 years later we realise this article was 100% garbage.

  • Chimmychanger

    This turned out to be scaremongering hyperbole then

  • Stephen Johnson

    I think that the figure are scare scaremongering too. This is a global crisis and international recession. Thatcher destroyed Britain’s manufacturing Base in the 1980 and replaced it with banking.

  • Robert McDowell

    This article is duplicitous scaremongering. Two thirds of UK external debt is liabilities backing UK banks’ foreign assets (loans) and merely underlines that The City does a lot of international business, more than any other financial centre. removing this aspect plus obligations arising from financial markets transactions, which are also offset by balancing items, leaves UK foreign debt looking relatively normal compared to other countries other than that we have been running a trade deficit for years if not proportionately as great as some other countries, most notably USA or a much smaller country with the highest trade deficit relative to GDP, which is Greece. It is entirely silly to portray national debt, public sector debt or UK foreign debt as something regrettable. There are many positive aspects. It is also silly to only look at gross debt and not consider net debt. Spectator should be more grown up about financial affairs.

    • Dimitri Delakovias

      “Two thirds of UK external debt is liabilities backing UK banks’ foreign
      assets (loans) and merely underlines that The City does a lot of
      international business, more than any other financial centre….” LMFAO…

  • Bennet Cecil

    As scary as it is for citizens of the UK to be indebted to the rest of the world it is scarier for those who bought that debt. Purchasers expect payment of interest and principal and could be disappointed. Purchasers of mortgage backed securities regret buying those assets now worth pennies on the dollar.

    US, UK, Japan etc will print more paper currency causing stagflation. Governments will continue to smother the private sector. Savers and pensioners will lose purchasing power as inflation heats up. Taxes will be raised helping to soak up the debased currency.

  • James Vinall

    Have a look at

    As of Dec 2008 the Office for National Statistics have UK gross external debt @ £5.97 trillion, central government debt @ £734.8 billion and most weird they have GDP @ £364.0 billion??? The IMF forecasts at have UK GDP for 2008 at £1.444 trillion (US$2.05) which is a bit more like it, but likely to be revised lower anyway.

    External debt at £5.97 trillion is still 312% of GDP at £1.444 trillion.

    If these are the real figures, Gordon Brown will be putting his final salary pension into a QOPS leaving for New Zealand very soon.

  • Bill

    Adrian Cox (prior comment;

    “The interest paid on this would be phenomenal.”

    It is

    “If this were true, the UK would be bankrupted – completely.”

    It is

    Kevin Magner;

    “or go back to coal mining/ship-building/textile production??”

    Yes, and farming aswell. Banking does not generate any real wealth at all, all real wealth comes from only; farming, manufacturing, energy and raw materials. Service industries (including banking) are a luxury which depend on a strong industrial base, neglect the base and the whole house of cards comes crashing down.

  • Stephen Price

    Whilst the headline debt figures at the very beginning of this thread are not unbelievable to a non resident. Would someone explain in simple terms please two issues that perplexed a number of us Ex pats over the festive period. Do the assets/ liabilities of ABN Amro the bank taken over by RBS almost in mid gasp of its bail out aid or worsen the figures shown.
    And why do RBS charge via it’s now ABN subsidiary extorniate interest rates in it’s non UK operations. Given its new largest share holders policy/funding stream and managerial input. Hardly a policy to ensure it’s or London’s pre eminence as a financial centre to the emerging markets.

  • Depression Proof

    All this talk of demand or lack of for Gilts and debt, the possibility of deflation or conversely hyper inflation worries me. How do I read what is going to happen. I switched 75% of my entire savings into Gilts 6 months ago thinking deflation was going to rule. Now I am worried the government will print money like hteres no tomorrow. So would you guys clear out of gilts now and if so where would you invest the proceeds? Farm land an opportunity?…it has already dropped by a third.

  • Dark Lochnagar

    Oil won’t run out for another 50+ years and when it does we’ll have a large renewables industry to take over. Nice to know that Scotland will look after you the same as it has done for the last 30 years!

  • Jon

    Norman’s question about the relevance of GDP to a country’s external debt is one that is seldom answered in journals and it deserves some attention.
    It is an illusion to think that if we are dealing with a specific company – let us say Alpha Balpha plc – we are dealing with a stand-alone entity. It is not, and it is responsible for many problems. Alpha Balpha plc is actually a cell or unit in a politico-economic body called the domestic economy of XYZ. It is in every way analogous to the cells of a body; collectively they make up the body, and however healthy the cells of the liver may be, for example, if there is a malignant tumour of the brain stem, atherosclerosis, and heart failure, the healthy liver cells will in the end go the way of all flesh. Just as medical science studies pathological states the better to understand normal physiology, so a theoretical economist may use the likes of credit crunches and recessions to discover the proper workings of a politico-economic domestic entity.
    When we deal with companies and organisations within a domestic economy, as a matter of course we take the legal, political, credit and tax systems of the economy into account. We take them so much for granted that they are present to us only subliminally and we do not focus on their importance, which blinds us to the reality that we are actually dealing with a cell in a politico-economic body. Things rather change when we are dealing with foreigners. They may want very much to do business with us, but they may know little of our ways and systems and so they will take advice, particularly from credit analysts.
    Let us say that Alpha Balpha manufactures winding engines for use in the mining industry. It is an important player in the field and it is an extremely reputable company known for its financial probity and prudence. Its overheads are enormous, because it must maintain a highly educated and trained workforce, whose experience is a vital component of the company’s superb manufacturing ability; to lay off such workers is not possible because re-assembling such a workforce and getting it up to production level could take years. It also has a huge investment in plant and machinery, which it must maintain in peak condition. It is also a profitable company. But, like most companies it is dependent for its existence on the availability of a line of credit. It has never defaulted on its obligations and its credit-worthiness is highly rated. For some years it has been sourcing components from Korea, and it has well-established commercial ties with Korean companies. It is undergoing an expansion phase and it finds it needs loan capital. To its horror there is none available in its domestic economy because of a credit crunch, and it is forced to look to its Korean trading partners for unusually high credit facilities. In Normal times these would have been forthcoming without much fuss but its Korean partners have seen the collapse of the £, the depth of the recession that is forecast for the UK, and have seen the UK FTSE100 decline by more than 30% in a year. They decide it would be prudent to ask the advice of their Bankers, who pass the problem to one of their credit analysts. The analyst makes his investigation and reports as follows:
    “Alpha Balpha plc is a well-run and soundly operating company. However, it operates within an economy that has a staggering level of external debt. The central government, local authorities, financial companies and non-financial companies have all raised loans from foreign countries and together they now owe 10 times the country’s GDP. What that means is that if they applied every penny of their GDP to paying foreign creditors, it would take them 10 years to pay everybody off. Since it is impossible for them to do any such thing, the question must be asked as to how long it would in fact take to repay the colossal sums that are owed, and the answer to that is by no means clear. The debt and related GDP problems are exacerbated by a number of factors:
    (1) It is likely that companies etc within that economy will need more foreign finance in the near future. With their debt levels as high as they are, that may well not be forthcoming;
    (2) Banks within that economy appear to have difficulty in lending money. If they restrict the line of credit of Alpha Balpha plc, or bring it to an end, that could threaten the very existence of the company;
    (3) Alpha Balpha plc sells its manufactured goods to foreign countries, many of which have unsustainable levels of debt in relation to their own GDP and look as though they will be forced to cut back because of the recession. That would threaten the viability of Alpha Balpha plc.
    (4) The high level of gross external debt owed by the UK means that sooner or later it will either default on its obligations because its level of GDP cannot finance reasonable repayments, or its government will have to introduce swingeing budgetary cuts and raise taxes substantially. If Alpha Balpha plc must pay higher VAT, huge additional national insurance contributions, and higher taxes of other sorts, it may not be in a position to service the loans it now seeks in Korea.
    I must therefore say with regret that it would not be prudent to lend any money to Alpha Balpha plc.”
    And so we have a situation in which the level of external debt of a country, in relation to its GDP, threatens the existence of even profitable and well-run companies, which proves conclusively that one of the great illusions of economics is to look at a company or authority as a stand-alone entity. It must be regarded as a cell in a politico-economic body.
    No doubt others can give additional (or alternative) answers to the question, but this is my take on it.

  • Peter Norman

    It’s sad, I know, but I have read every post here trying to get a feel for the problem being highlighted. I’m not an economist nor an accountant but I’ve directed several companies over the years and I can quickly put together my own balance sheet, rough P&L and cash flow forecast of any trading company simply by asking enough questions of accounting staff. Is the same thing possible for GB (Gordon Brown) Plc? If so, where would one find reliable data and/or truthful Treasury staff to ask?

    Is GB Plc solvency the issue we should be discussing?

    There also seems to be much confusion in these post about the various effects of government debt, net international corporate debt and total personal UK debt.

    The components of the GDP statistic (I believe) are C (Consumption), I (Investment), G (Government spending) and Net Export/Imports. Can somebody explain to me why UK debt (net or gross) measured as a ratio of GDP is helpful in understanding GB plc problems?

    Another thing I can’t grasp in the GB solution to the credit crunch is stuffing bank balance sheets with high interest government debenture stock to finance purchase of low yielding gilt. Is this madness or am I stupid? (Before anybody replies it’s the latter, I should add that I sold all my shares, personal and pension fund, two years ago!)

  • Jon

    The Joint External Debt Hub (JEDH) of the Bank for International Settlements (BIS), developed jointly with the OECD and the World Bank, brings together detailed external debt data that are published individually by countries that subscribe to the IMF’s Special Data Dissemination Standard (SDDS) (see The information it provides is even more scary than that given by Fraser Nelson in his article. According to that database the gross external debt position of the UK at the end of the second quarter of 2008 was £11 469 870m which I make £11.46tr, twice the level of debt of the USA. A detailed breakdown is provided by the database.
    According to the IMF UK gross external debt at the end of 2007 was £5 675 870m, which I make £5.68tr, but that relates only to Balance of Payments. This information is available in the Pink Book. Go to and under ‘Releases’ select Pink Book and then work your way through the various options until you reach the Table that gives UK Gross External Debt IMF BoP IIP. Slightly different BoP figures are supplied by BIS. According to them the debt is £5 085 348m, which I make £5.06tr. Whichever figure you use (IMF or BIS) our BoP debt is equal to the debt of the USA.
    I have not found a Table of UK Assets, so put together the Reserves picture from the Pink Book. Alas, the Reserves are a mere £97bn (and some of those reserves are pretty dodgy I might say). Go read through the Tables. Your heart will sink to somewhere lower than your boots when you see what wee Broon has done to us (the figures were not marvellous when he took over as Chancellor but they were a very great deal better than they are now).
    Some scribes have loudly trumpeted that ‘real’ Government debt is £500bn+. It is difficult to know where they get these figures. Wee Broon uses sleight of hand to disguise the truth. He tells the country that debt is not yet 3% of GDP and that at this level it is well within the levels allowed by the Maastricht Treaty, and of course he is right, because levels of real debt is so horrendous in Europe that charlatanry is alive and well and the ‘let’s pretend’ is that this year’s debt is all we need look at. Last year is history and next year is ‘another’ year and we start counting from 1 again. The result: debt accumulates from year to year. It is never carried forward as it would be in any respectable accounting system. Hey presto: lying to the people about debt is easy peasy.
    As you study the figures you will see a Treasury gripped by the kind of madness that would prompt a family to apply to the High Court for a curatorship order for any father squandering the family assets in this way. He has not merely sold the family silver (or gold, if you prefer) he has sent the family plummeting into irreversible insolvency. We are not merely the sick man of Europe, we are terminally ill, and our end will be no more glorious than that of the Ottoman Empire in the twenties of last century. It seems that prosperity has forever flown from this green and pleasant land.
    The Ottoman collapse saw Attaturk establish himself as a dictator. Can democracy survive in this sort of penury? Does it deserve to survive? And if it is the only alternative to wee Broon, come in Oliver!

  • Adrian Cox

    This would be scary, but is NOT TRUE.

    If this were true, each Briton of 16 or over would (effectively) owe foreign countries around £200,000 (do the maths – GDP of $2.772 trillion * 4 (400%) / 37,000,000 people over 15yo / 1.5 dollars to the pound = £199,783 PER PERSON!!!). Simply not possible I’m afraid

    The interest paid on this would be phenomenal.

    If this were true, the UK would be bankrupted – completely.


  • BennyMuller

    By now this graph is all over the place and even started to cause a bit of panic on some blogs.

    Clicking on CIA Factbook would have produced the same ratio within two minutes by the way because it hasn’t changes much over the past year.

    What bothers me is that the initial article was strongly suggestive of this being net foreign debt, which would have suggested the UK was the next Iceland.

    Not amused.

  • Letsgotoswitzerland

    OK, this looks high, but are you stating overseas debts as “net”? In other words have you calculated what foreign countries and organisations owe us and taken that away from what we owe to arrive at a net debt figure?

  • John

    Debt vs assett/income on personal or national level appears to be key.
    Brown repeatedly makes optimistic projections and bases risk or debt on these projections – pensions deficits, borrowing including off book PFI as a proportion of GDP.
    Many believed his “end to boom and bust/prudence” sham and overstretched themselves with mortgage/debt.
    Unfortunately, there is only one way to learn this lessen – pain.
    It is coming – just a matter of how it will be inflicted.
    Nationally currency trashed and potentially loss of inward investment.
    Individuals – loss of money to spend on holidays/imported goods already occurred and more lean times ahead.
    The government would prefer the pain to be spread from those with large individual risk to all – regardless of previous frugality – ultimately this will both reduce incentives and increase resentment.
    The risk with his current strategy appears to potentially catastrophic.
    We have been through a phase similar to tulip bulb mania with the housing priced beyond the reach of the customers who could only enter the market through greater leverage – we moved past a point when it was obvious that a correction would occur though this was exacerbated by the permeation of subprime mortgage debt through the whole of our economy. These 2 debts are now being realised. There is nothing from Brown that demonstrates that he has any ability to budget for this other than borrow and worry about it after then next election. He is gambling with the economy and the future generation in an attempt to secure himself an election win – to prove that he would be prime minister elected by the people – he has no other interest and cannot be trusted to do what is right.

    The worst thing is that to learn something from this.
    Those that spent beyond their means or those that overstretched themselves on mortgages have to find out the consequences – society as a whole would then learn a valuable lesson and then become more stable as a result.

  • Smart Head

    Our Oil and gas is drying up, our Gold has been sold (for a pittance), our currency is collapsing, unemployment is rising, our finacial system is riddled with toxic debt, our industrial strength is withering away. Our debts are now set to spiral higher from already unrecoverable levels. We’re all doomed.

  • Mark N

    Yep, I’m in the layman-with-a bit-of-common-sense category. OK, I’ve a science degree and an MBA but I don’t for one minute delude myself about how much of all this banking and financial technicality I properly understand. For me, the point is that common sense says you can’t borrow, tax and spend your way into a financial crisis and then, er, borrow, tax (soon) and spend your way out. How does that work in practice, Mr Brown? You can’t do it as an individual; you can’t do it as a business; why can you do it as a government?

    A key issue here must surely be the extent to which the government’s recovery plans are predicated on economic growth sooner or later. However, as mankind’s era of endless cheap energy (and so “infinite” economic growth) comes to an end – perhaps more abruptly than casual observers might expect – how on earth are we going to generate the GDP, profits and taxes to pay back the stupefying levels of debt that Brown has now committed us to?

    Good old commom sense is screaming at me to think hard about what self-reliance means in practice, because relying on our political “elite” seems to be turning into an increasingly risky if not downright stupid way to organise one’s affairs.

  • hadrian

    I’m no economic historian so am not sure if the AD 1775 faced a worse financial crisis than we do but for your amusement, here’s what I’ve just come across by Church of England minister and hymn writer( Rock of Ages etc) wrote satirically about his own day’s national debt.

    ‘ Qu.1- Supposing this debt to be only 130 millions of pounds sterling at present( although it’s much more) and that ii is to be counted in shillings; and that a man could count at the rate of 100 shillings per minute, for twelve hours each day, how long would it take?
    Ans-98 years, 316 days, 14 hours and 40 minutes.
    Qu- supposing the interest of this debt to be only 3 1/2 per cent per annum what does the whole annual interest amount to?
    Ans-four million 550 thousand pounds sterling.
    Qu-How dot the government raise this interest yearly?
    Ans- By taxing those who lent the principal, and others.
    Qu- When will the government be able to pay the principal?
    Ans- When there is more money in the treasury alone than there is at present in all Europe.
    Qu- And when will that be?
    Ans- Never.’

    Sounds horribly familiar, not we can take much comfort from that!!


    I’m no economist, but it seems to me that we’ve all but destroyed our farming, & without food nothing else could function. We’ve then done the same to our industry.
    We’ve been living in the lap of luxury ever since the demise of the aforementioned, thinking work really does take place in the office. It doesn’t, & now we’ll pay the price!


    I’m no economist, but it seems to me that we’ve all but destroyed our farming, & without food nothing else could function. We’ve then done the same to our industry.
    We’ve been living in the lap of luxury ever since the demise of the aforementioned, thinking work really does take place in the office. It doesn’t, & now we’ll pay the price!

  • hadrian

    It strikes me Brown is not unlike Mugabe in his handling a crisis- just point blank deny its existence! Plague- what plague? Long-term debt induced bankruptcy-? Never heard of such a thing!
    One has to admire your relentless spade-work, Fraser but my horrible fear is that ordinary punters- even reasonably intelligent ones- simply don’t understand the intraces of finanace and it all sounds like technical jargon to blind us with science. The result is, as Diane Abbot pointed out last night, in a crisis people yearn for a reassuring Leader and Broon is doing a damned good job bamboozling them into believeing it is he!! Come on, Tories, you’ve got to explode their statist myths- starting with hard fact facing. And HARD FACT No1 is the State will ultimately let us all down if we delude ourselves into thinking it has a magic wand and omnipotent powers. Broon’s policy is basically ‘take, take, take..’ which is ok only for so long.

  • Andy Link

    Buy Gold and pray.

  • Kevin Magner

    The UK external debt ratio is higher than the others shown because of the size of the UK banking industry is larger relative to the economy than for the other countries shown. Are you seriously suggesting that we shrink the City so that the chart matches the other countries?? or go back to coal mining/ship-building/textile production?? You need to understand the asset side of the economy and banking to form a view as to whether that debt ratio is a problem.

  • Chris Cook

    It’s been clear for a long time that a deficit-based economy is unsustainable.

    Perhaps it’s about time we took an alternative look at “Equity” instead?

    When we talk about Public and Private, we mean “State” and “PLC” respectively: but there are emerging alternatives to the good old Joint Stock Limited Liability Company that have the potential to change the game entirely, with a bit of good old British ingenuity….

  • Simon Stephenson


    Thanks for your help.

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