Why investors love lending to the UK government
One question that many of you have asked me is why investors have become so reluctant to lend to the Italian and Spanish governments, but have apparently become keener to lend to the British government.
Or to put it another way, why when the prices of Spanish and Italian government bonds have been tumbling has there been an increase in the price of British government debt - such that on Friday, after a week of extraordinary volatility, the yield on 10-year UK gilts was around 2.3%, a fraction of the 6.5% yield on comparable Italian debt and 5.9% for Spain (remember that when the price of debt falls, the yield or implicit interest rate rises).
Even though that 2.3% is a bit higher than it has been in recent days, it is cheaper than it has ever been for the UK government to borrow, whereas the Spanish and Italian governments are being forced to pay punitive interest rates.
It is also something like a third cheaper for the British government to borrow than for the French administration (and see my note of Friday for more on this disparity).
So given that the UK government, UK households and UK banks are struggling to repay a veritable mountain of debt - more in aggregate than the UK has ever borrowed in its existence - why on earth does the UK public sector look an attractive place to investors for their precious cash?
Why does the UK look to investors like a safe haven in a financial storm, while Italy and Spain - and even to an extent France - are seen as coracles in the middle of a hurricane-lashed ocean.
Their decision to lend to the UK looks even odder, when you look at the respective public-sector deficits - the gap between their spending and tax revenues - of the UK, Spain and Italy.
The European Commission, for example, last week said that the UK's deficit in 2011 would be a stonkingly high 9.4% in 2011, followed by 7.8% in 2012 and 5.8% in 2013, whereas for Spain the progression would be a less troubling 6.6%, 5.9% and 5.3%, and for Italy it would be a seemingly benign 4%, 2.3% and 1.2%.
And, for what it's worth, if you believe that the austerity measures that the Italian parliament has just approved will be effective, then Italy would have no deficit at all in 2013.
Or to put it another way, for all the UK government's pre-emptive austerity measures, on paper the fiscal position of the UK is worse than for Italy and for Spain.
The picture is altered a bit when you look at the ratio of government debt to GDP, which is forecast by the European Commission at 89% for the UK next year, 74% for Spain and 121% for Italy.
On that basis, the balance sheet of the UK public-sector looks considerably stronger than Italy's but weaker than Spain's.
Even so investors still prefer to lend to Britain than to Spain.
What is going on? Why do investors think there is a negligible chance of the UK reneging on its debts, while there is a meaningful risk that they won't get all their money back from Spain and Italy?
I will leave it to George Osborne and Ed Balls to argue about the extent to which the sine qua non of investor confidence in the UK is the pace of the government's deficit reduction programme (or we'll be here all day) and concentrate instead on four structural advantages that the UK possesses.
By the way, I will also leave for another day the question of whether the growth and export prospects of the UK are intrinsically superior to those of Spain and Italy, except to say that the UK's manufacturing sector has shrivelled much faster over the past 10 year's than Spain's and Italy's - so it is hard to argue that the UK starts from a position of huge industrial advantages, especially given that the UK has been dependent on unsustainable consumer spending to power the economy for so long.
So what are the UK's structural advantages?
One of them, as Stephanie Flanders has pointed out, may be that the UK has a political system that is more adept at making tough decisions in a crisis and then implementing them - and some would argue that's been proved to be true even when our first-past-the-post system delivers a coalition government.
Then there are three other conspicuous and relevant differences between the UK on the one hand and Spain or Italy on the other.
First is that the UK has a central bank that has proved itself willing and able to buy vast amounts of the British government's debt - and as you know the European Central Bank has been shouting very loudly that it would be both illegal and wrong for it to do the same.
Of course, the Bank of England would argue that its commitment to buy £275bn of UK government bonds through its quantitative easing programme is not a bailout of the British government's finances but an attempt to stimulate economic activity by exerting downward pressure on longer-term interest rates (via the gilts price) and by injecting money into the banking system.
But a rather helpful spin-off benefit for the chancellor of the exchequer is that the Bank of England is a conspicuously big buyer of UK debt.
Second, the UK has a currency that adjusts to the competitive strength or weakness of the UK economy alone, whereas - arguably - the exporting businesses of Spain and Italy are forced to sell overseas at higher prices than they would ideally like because the euro's value is determined by the perceived robustness of Germany's formidable manufacturing capacity.
Finally there is a relatively prudent way in which the UK's debt has been managed by the semi-autonomous Debt Management Office - whose performance looks more and more important and impressive.
Next year it expects to have to borrow £162bn or 192bn euros to keep the UK afloat, of which just £53bn or 62bn euros represents borrowing to repay existing debts that are falling due for repayment.
By historical standards for the UK, that is a lot of money.
But compare it with Italy - which next year has to borrow 307bn just to repay maturing debt. On top of that, Italy will have to borrow even more to finance the gap (however small this turns out to be) between its revenues and outlays.
And although both Spain and France have smaller deficits than the UK, they will have to borrow comparable amounts to the UK in total - more than Britain in the case of France (according to Bloomberg data) - because so much of Spain's and France's debt is short-term, and needs repaying next year.
It's the number "13.99" which tells you the UK isn't bust and probably won't go bust. That's the average maturity of British government debt, the number of years that we as taxpayers have to pay off what we owe our creditors.
Those 13.99 years should surely be long enough to reconstruct our economy to generate growth in a balanced and sustainable way, to prove that we can pay our way in the world.
So here's the funny thing. If you are one of those who rails against the short-termism and excessive risk-taking of some banks and finance businesses, you might note that a public sector financial institution, the Debt Management Office, has taken a reassuringly long-term approach to managing the UK government's debts - and without its prudence, we might all be in Queer Street or Skid Row by now.