April 20, 2011
The Washington Post told readers that when interest rates on UK debt rose from 3.0 percent in 2009 to 4.2 percent:
“It was a sign that the country’s creditors were beginning to get nervous that the nation’s debt was becoming unsustainable.”
It doesn’t tell readers how it made this determination. The more obvious explanation is that the UK economy had come out of the free fall that it and other major economies were in. During this free fall UK government bonds were one of the few trusted assets, which meant that they paid extraordinarily low interest rates.
A 4.2 percent interest rate, which is less than 2.0 percent in real terms, is still extremely low by any historical standard. For example, the real interest rate on U.S. government debt was 2-3 percent in the late 90s when the government was running budget surpluses. Lenders usually demand far higher interest rates on assets to which they attach considerable risk.
It would have been worth mentioning in this article (which explores the lessons that the UK holds for the U.S.) that hundreds of thousands of workers in the UK are currently unemployed so that the country could maintain its top credit rating.
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