One crisis fixed, but can we fix the next?

‘We got away with levels of borrowing that would once have been thought impossible’

In Britain, public borrowing is falling at a faster rate than anyone dared hope a few years ago. The ratings agencies are starting to drop hints about upgrading rather than slashing national credit ratings. Heck, even the Greeks are contemplating a return to the bond markets without provoking howls of protests from investors. The sovereign debt crisis that gripped the markets from 2010 to 2015 looks to be over. No one is threatened with bankruptcy anymore, and governments are not about to close down as they run out of cash.

The trouble is, that is largely an illusion. True, the markets turned out to be far less powerful than once thought, and debt loads that would once have seemed crushing have turned to be completely manageable. But that doesn’t mean debt doesn’t matter. In truth, every major economy owes far more than it can possibly afford – and when the next downturn comes, that will become painfully apparent.

Rewind a few years, and the sovereign debt crisis loomed over all of us. Greece, Portugal and Ireland went bust and many other countries looked to be heading for the same fate. The verdicts of until then obscure credit rating agencies were suddenly news. The bond markets were in open revolt, sending yields soaring on the countries most at risk, while politicians argued over who had the best plan to keep national treasuries solvent. It was a dramatic, high-stakes saga that gripped investors worldwide.

But now it looks like it is over. In this country, the Government borrowed a mere £16bn in the first three months of this year, £5bn less than at the same point in 2017. The deficit is projected to come in at less than 2pc of GDP for this fiscal year, below the target for 2020. The Chancellor is more likely to be increasing spending, especially with a chaotic exit from the European Union looming, than cutting it even further. It certainly isn’t something anyone is worrying about right now.

The same is true of most other countries. Across the eurozone, the debt to GDP ratio fell from 89pc to 86pc in the last 12 months with the biggest falls in Ireland and Cyprus. In the US, government revenues are booming despite President Donald Trump’s tax cuts (the Laffer Curve has worked its magic yet again, with fairer taxes raising more cash). Even Greece, the country that started the whole crisis, is expected to exit its bail-out programme this year and start tapping the bond markets for cash. By 2016, only 11 countries were still Triple A rated, but over the next few years that may well start to climb again – it was 16 before the crash, including the UK.

So the crisis is over, right? In a sense yes. Ratings are no longer being slashed. Countries don’t risk being cut off from the markets, and even austerity has been throttled back. We have learned a few useful lessons along the way. We now know, for example, that a sovereign country with its own central bank can take on a lot more debt than anyone previously thought possible. It can go as high as 100pc of GDP, and perhaps even higher, without any really adverse consequences. The 80pc or 90pc levels that used to worry everyone so much are not really a problem. In the battle between the debt markets and governments, it soon became clear the sovereign states were always going to be the winners – even in the eurozone, as soon as the European Central Bank promised to intervene in the markets (six years ago this week, as it happens) the bond markets quickly gave up the struggle. Even better, massively increased national debt didn’t spark hyper-inflation as we once feared. It might have crowded out private investment – we won’t really know for another decade at least – but there is no conclusive evidence of it so far. Overall, we got away with levels of borrowing that would once have been thought impossible.

And yet, the risk now is that we become complacent. In economics, as in so many other areas of life, just because you got away with something once doesn’t mean you will get away with it next time as well. We still have debt to GDP ratios that are extraordinary. We will have virtually no room for fiscal flexibility when the next downturn comes. And we are still piling up debt that will have to be paid back by generations to come, or else conjured away with a round of hyper-inflation. We got through the last sovereign debt crisis, but only just – and at the cost of persuading ourselves not to worry about the next one. When that arrives, it will inevitably be a lot harder to cope with.