Unsuprisingly standard and poor

Moritz Kraemer, chief sovereign ratings officer of everyone’s favourite credit rating agency Standard & Poor’s (one of the ones that helped cause the financial crash by not rating things properly) released an opinion piece titled ‘Brexit threatens UK’s top credit rating.’

The EU referendum is a hot topic and both sides have proven themselves to be incapable of saying something that might actually help voters make an informed decision, at least in the mainstream media. Instead there is a lot of fearmongering and Mr Kraemer, not to be left out, has a pop at it too.

He mentions a lot of stuff but it was mainly these two comments that caught my eye:

“Leaving the EU, our credit agency believes, would be a negative for the U.K.’s sovereign credit rating.”

and:

“Consequently, a vote for “Leave” would likely lead Standard & Poor’s to lower the U.K.’s AAA rating… the U.K. would lose its place in the increasingly exclusive club of AAA-rated sovereigns.”

To borrow a little context from Wikipedia, a credit rating is ‘an evaluation of the credit worthiness of a debtor, predicting the debtor’s ability to pay back the debt‘.

Following this through, Kraemer believes that the UK leaving the EU would hinder the Government’s ability to pay back it’s debt, though he goes no further than stating the potential for ‘significant adverse financial and economic impact’ and ‘risks to effective, transparent and predictable policymaking’ as explanations for why.

This would be applicable if the UK borrowed money in a foreign currency, something that is at the root of the ongoing turmoil in Greece. The difference between Greece and the UK however is that the UK Government is the monopoly issuer of the currency it has borrowed in.

A simple way to describe this would be a parent who wanted to make sure their kids did their chores.

In order for their children to recieve their pocket money, they must to earn a certain amount of paper tokens. They can only earn these tokens by doing chores, as mandated by their parents.

Is it ever possible for the parents to run out of tokens they owe to their children?

Of course not. So long as the children’s parents are prepared to produce the tokens and hand them to their children, they will be able to fulfil their obligations to provide their children with tokens.

So it is the same for the UK Government. The Bank of England (an ‘independent’ subsidiary of the UK Government, but a subsidiary nonetheless) has an infinite capacity to create new money like other Central Banks, which we saw in action when they created £375 million of new money for quantitative easing.

Provided the Government’s debts are denominated in its own currency, it faces no financial constraints in being able to service them. The choice to default on the debt is a political one, not an economic one. The same is true of similar countries with their own Central Bank such as the US, Japan and Australia, among others.

This does not mean that there will not be economic effects from a Brexit vote. But let’s make our decision on facts. Not statements designed to scare and misinform.

 

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