How much is Britain’s true national debt? Gordon Brown says 37% of GDP, the ONS says 43% of GDP – but this is just government debt. The reason Britain is in so much trouble is that our corporate and household debts are huge. It is the combination that makes us such a credit liability – but no one has ever put together a combination.

Until now.

Michael Saunders from CitiGroup has calculated ‘external debt’ – ie, what Britain owes the rest of the world. It is not 40% but 400% of GDP, the highest in the G7 by some margin. The next down, France, is 176%. America, flagellating itself for blowing such a debt bubble, is just 100%. Japan is about half America. The below graph shows ‘external debt’ – both in mid-2008, and five years ago.

G7 Countries - external gross debt/GDP ratios, 2003Q2 – 2008 Q2

Narrow it down to short-term debt, ie IOUs that have to be paid back within a year, and the picture grows even bleaker. It adds up to 300% of GDP – six times that of France whose loans are long-term. Saunders says, with some understatement, that this makes “the UK economy and financial system highly vulnerable when, as now, global banking and capital flows dries up.” Here is the picture, narrowed down to short- term debt (ie, due by next Christmas).

G7 Countries - ratios of short-term external gross debt/GDP, 2003Q2 – 2008 Q2

I believe that an IMF bailout is highly unlikely. But the highly unlikely has been happening rather a lot lately. There is a fairly clear apocalypse scenario emerging: that Britain becomes reliant on new borrowing, that the Arabs/Chinese get sick of buying IOU notes in devaluing sterling, and refuse to buy more debt at anything other than loan shark rates. Then Britain has to go to the IMF. For a country with as much short-term debt requirements as Britain, there is nothing fantastical about this.

Financing Britain is an issue. Our creditors will be looking at Britain with its 400% debt/GDP ratio and ask how this island country with its mammoth trade deficit is going to pay the money back, especially if its Prime Minister prescribes more debt as the solution.

But this crisis has taught us to pay heed to the highly unlikely, to watch out for the Black Swans. It could come in the form of UK banks being unable to raise capital from the markets, from liquidity issues in UK gilts, whatever.

P.S. To answer CoffeeHousers’ query, this is "external debt" by the IMF definition, which is gross. (And does not include contingent liability, just debt). One must take into account that Britain is likely to have proportionately greater foreign assets whose value would be amplified by sterling’s plunge. But how much greater? I’ll keep hunting. Every crisis is different, and each has its own metrics. It was our concentration on the metrics of the last crisis (inflation) that blinded so many to the causes of this crisis (debt).