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Chart of the day: Advanced Economies’ Gross Financing Needs

Japan and the US, as the two largest economies with high deficits, also have the largest gross financing need, ahead of all of the euro zone periphery, Belgium and France. But they are sovereign in their currencies and have therefore not been part of the sovereign debt crisis.

The analysis by Pimco on British National Solvency last year is applicable here as well:

Q: PIMCO has identified sovereign risk as a key theme for 2010. How significant is this risk for the UK relative to the eurozone?

Amey: Sovereign risk is a key risk for the UK but in a slightly different way to the economies of continental Europe. The UK government deficit, which is currently running at around 11% of GDP, is one of the highest both on record and within the developed world. That creates a potential risk as regards to the ability of the government to finance its debt. However, unlike countries within the eurozone, the UK has the advantage of an independent floating currency, making it highly unlikely it will suffer the problems currently besetting parts of the eurozone. With its own currency, the UK will always have the ability to repay its debts, but it may devalue the debt in real terms when viewed in non- GBP terms. Therefore, UK sovereign debt risk will continue to be an issue as long as UK debt levels remain high, which in turn will put pressure on the currency and the inflation rate, and potentially erode the longer-term value of government debt. [underlining added]

My take:

Currency revulsion that results from financial repression for a monetarily sovereign government expresses itself as currency depreciation first, and not via interest rates until inflation from money printing and currency depreciation force policy rates higher.

(Hat tip Global Macro Monitor).

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

5 Comments

  1. fresno dan says:

    Very enlightening analysis.
    What I wonder about when I look at that is Japan.
    What is the cost of oil in Japan 2011 versus 1980 in real terms?

  2. Dave Holden says:

    Which comes back to my earlier question why do investors not see currency depreciation (inflation) as much of a risk to their investment as the risk of default.

    • Foreign investors do see the risk in particular. What Pimco was saying is that foreign investors need to appreciate the currency risk in the UK from financial repression. Domestic investors should concerned because of negative real rates but less so because of the lack of currency risk.

      • Dave Holden says:

        Ah thanks.

        So do I understand it correctly that in reality since a government in charge of its own currency can effectively control rates (given they control short term rates) that lack of buyers of their debt is only a problem in that at some point they may end up as the only buyer of their own debt.

  3. David Lazarus says:

    The figures for the UK deficit are very optimistic. It looks like the UK government will still be adding to its deficit in 2014 and that is with the governments very optimistic growth forecasts which will be wide of the mark. The government plans include 3% growth to achieve their targets and it is highly unlikely that they will be anywhere close. They are less than 1% this year and it will probably fall back next year. So the deficit reduction plan will not be as successful as they hope. The next problem is do they go for accelerating the cuts to try and get some growth or go on a spending spree to get back into power?