The International Monetary Fund has just listed the UK as the country "most susceptible" to having its economic recovery derailed by a lack of credit in its global financial stability report.
The Fund says there aren't enough domestic resources to finance government borrowing and private sector credit, and that funding gap would represent about 15 per cent of national income in the UK during 2009 and 2010, compared with 2.4 per cent in the US and 3 per cent in the eurozone. This year the Bank of England has filled the gap with its £175bn programme of quantitative easing, creating money out of thin air to buy assets, predominantly government bonds.
"In terms of regional vulnerability, the United Kingdom appears most susceptible to credit constraints under our stylised scenario, given its significant reliance on the banking channel and the projected sharp decline in domestic bank balance sheets, as well as substantial public financing needs," says the IMF.
The choice is between any combination of
- more quantitative easing, in which case expect the value of sterling to drop further, making imports and the cost of living more expensive for all, hitting those on fixed incomes and pensioners especially hard,
- drastically less spending by government and the private sector, but mostly current spending by government because that is where the biggest shortfall and hence most of the funding gap arises, which will hit the public sector worst immediately but damage the prospects of UK business through lack of investment and will keep unemployment high; or
- much higher interest rates to attract foreign lenders to put their money into sterling, in which case capital intensive businesses and mortgaged homeowners get it in the neck and few new jobs will be created.