Reader's Letter Of The Day

From the FT:

Sir, In the hubbub over the current budgetary situation one frequently hears that the UK has a recent history of effective default by unilaterally reducing the coupon on government debt. Indeed, Carmen Reinhart and Kenneth Rogoff, in their recent book on financial folly, list the war loan conversion of 1932 in their table of examples of domestic default or restructuring and, perhaps as a result, this example has gained wide currency.

The pre-1932 stock, 5 per cent war loan was repayable at three months’ notice between 1929 and 1947. In late 1931 market interest rates had fallen, so that it was in the taxpayers’ interest for the government to redeem the debt and to issue new stock at a lower interest rate. This became 3½ per cent war loan repayable in 1952 or afterwards.

This was in no sense a default or a unilateral rescheduling but was entirely in accordance with the prospectus of the 5 per cent stock, as the chancellor of the time explained to the House of Commons. I imagine that the same was true of the 19th century conversions, also listed by Reinhart and Rogoff as default or restructuring.

M.R. Weale,National Institute of Economic and Social Research, London SW1.