Summary review of the external debt of the United Kingdom (revised)

 No. E 67: A 66974 _",,~.~1t" ~ \ ::' \ \. . This report is not to be published nor may it . . _._,,_.~ _1 be quoted as representing the Bank's views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT SUMMARY REVIEW OF THE EXTERNAL DEBT OF THE UNITED KINGDOM (revised) Novem.b~r 16, 1949 ...• Economic Departm.ent Prepared by: Mr. Andersen Mr. Lynch Economic Departmeni General Studies S. Andersen and J. ~neh. November 16, 1949~ SUMMARY BEVIEW' aIr THE EXTEmTAL DEBT 0]' THE UNITED KINGDOM 4 During and after Wor~d War II the United Kingdom incurred. foreign obli- gations totalling around $6,300 million in addition to accumulated sterling balances amounting to L3.2 billion ($9 billion) in June 1949. Nearly all of the foreign debt other than that represented by the sterling balances is due to the U. S. and Canadian Governments. The chief components of the external funded debt of the United Kingdom (i'7hich excludes the sterling balances) are the following1/ : I. United States Credit§t In December 1945. an agreement was reached betw'een the Un! ted Kingdom and the United States for the final settlement of Lend-Lease and Recinroca1 Aid ($619 million), for the acquisition by the United Kingdom of United States §Yrplus property and insta.llations located in the United Kingdom ($53.7 million) and for all other financial claims arising out of the war. In this settlement the net sum due to the United States was fixed at $673 million, and prOvision was made for its payment in fifty annual instalments beginning December 31, 1951, and for interest on the unpaid amount at 2% p~a • .At the same time, Great Britain obtained a loan from the U. S.Trea.!'\ury of $3,750,000,000. This credit, "rhich, after ratifications, became effective in the middle of 1946, was not expected to be cOiJlPletely "Ti thdrawn before 1951:. In fact, however, it was used up in two years. This loan was to be serviced on ~/ See Annex I for a tabulation of the outstanding debts. A brief description of the tl}'orld War I debt is ~ven in Annex III.  2 •. the S$Me terms as the lend-lease eredit~ In both of these loan~ there is a clause which permits waiver of interest (but not of amortization payments) for any year in which it is determined that specified adverse economie conditions exist t lJ Under the ECA program Great Britain sO tar has borrowed $313 mi11ionz/ to be amortized over 28 years (beginning 1956) and carries interest of 2!% p.a. (beginning 1952)~ This loan agreement also includes a waiver provision. The rest of the U. S. debt comprises an BFO loan dating from 1941 and now outstanding in the amount of $107 million. This loan is collaterally se- cured by assets, the return on which are sufficient to pay the interest and. in addition, provide for a rather quick amortization.)} Service on this loan is therefore not included in the interest and amortization estimates presented in this paper. The total external debt to the U. S. (excluding the BFO loan) no", amounts • • to $4,736 billion, on which no payments are due in 1949 and 1950. The payments to start in 1951 are estimated at $141 million, gradually increasing thereafter to a peak of $162 million by 1980 and declining to the last payment of $141 million in the year 2000. If, in any year prior to 1960. the waiver clauses should be invoked. service charges would be from one-third to one-half of these amounts. There- after, as the interest p~ents decline, the effect of the possible use of the 1/ For the text of the "waiver c1ause 1t see Annex II. 2/ It is not expected that any sizeable part of the 194~50 ECA loan budget will go to the U.K. J./ During the first 9 months of 1949 the outstanding amount was reduced from $141 million to $107 mi11ion~ waiver provisions ,.,ill decline correspondingly. II Ii Canadi an Creg,! ts , The debt due to Canada consists of two parts, The first is a no~ interest bearing loan dating from the early part of the war amounting originally to Can.$700 million.. It has since been reduced to Can.$297 million (U.S.$269 million). No fixed annual payments are required on this loan but, under the present arrangement, it is being paid off by the dollars received f~om U. K. citizens selling Canadian securltieso In view of. this arrangement. no payments on this loan are included in the . interest and amortization tables. . The second loan of Can.$1,250 million (equal to U.S.$1,131 million at the present rate of exchange) was made in 1946. All of the loan but Can.$135 million (U •.S.$122 million) had been drawn down by the end of October 1949. No payments are due in 1949 and 1950. Service p~ments start in 1951 when they amo1L'Ilt to about U.S.$36 million, continuing at that rate through the year 2000. This loan has also a waiver provision, the effects of which are similar to those of the corresponding provision in the U. S. loans. 1i III. Qtber Debts, A third segment of the external debt of the United Kingdom is made u~ of unspecified minor "miscellaneous" credits totalling ~17.? million ($50 million), the details of which, from the standpoint of interest and amortization schedules, are not available and, therefore, are not included in the computation of interest and amortization. zJ 1/ For further details see Annex II. 2/ Nor is here included the share of the Belgian franc credits under the Inter- European P~ments arrangement for 1949-50, to which the U,K. is entitled (dollar equivalent 28 million). It is uncertain to what extent this credit "'ill be used" and so far only $2.2 million has beeu dra'l11l.  4, The total U. S. dollar value of the funded atternal debt of the United Kingdom specified above amounts to $5,867 billion as of 1949 (excluding the $107 million BFO loan, the u.s.$269 million Canadian non-interest loan and t~e $50 million miscellaneous loans, but assuming full utilization of the Can.$1.250 million credit) 0 The annual payments for ln~erest and amortization on this debt are summarised in the following tab1e1 /: Interest and Amortization P~ments on External Long-Te~ Debts of t United Ki dm (expressed in thousands of U.S,Do11ars ~:i!1u ,s: $,;~=~I T~!fti. Total $ e~G~Bnd C~;a,;pWa.ive - Tota.l T~:i';e~ 1949 - ... - ,..; 1950 - ... ... - ~ .... 1951 140~745 52~290 35~999 1J~J74 176~744 65~664 1952 148~570 61~161 35~999 13~641 184~569 64~802 1953 148~570 62~227 35.999 13,914 184,569 76~141 1954 148,570 63,316 35~999 14~194 184,569 77~510 1955 148~570 64~426 J5~999 14~477 184,569 78,903 1960 152 9 262 74~009 35~999 15,984 188,261 89~993 1970 158~180 93~612 35~999 19~484 194~179 11)~096 1980 1629 142 114~256 35.999 23,751 198~141 138~007 1990 140,745 113,194 35.999 28,952 176,744 142~146 2000 140,824 138,063 36,020 36,020 176,844 1'(3,377 ! I 1/ I nclude<\in the table are: . The U. S. Treasury Loan ($3,750 million) The U. S. Lend-Lease and Surplus Property Credit ($673 million) ECA credits ($313 million)~ . . The Canadian postwar loan (U.S.$ equivalent $1,131 million), Excluded aret The RFO loan ($141 million) The Canadian no~interest bearing credit (U.S.$ equivalent $269 million) nHiscel1aneous" loans totalling .Ll7.7 million (U.S .. $50 million). The I~1F dollar drawings ($300 million). For furthe~ details ~ee Anne~es I and II. zJ i.e. - the amount to which the service would be reduced if the waiver clauses were put into effect in that particular year. The question whether amounts waived would become due in subsequent years was answered as follows by ~he then Secretary of the Treasury. Mr. Fred Vinson. testifying before the Committee on lla.nking and Currency. United. States Senate, MarCh 5, 1946& "No, Sir. It is waived, forgiven.· cancelle<\... "  5. In addition to the funded debts desc.ibed ~bove. there are other obli- gations Qutstanding which should be taken ~nto consideration in evaluating the external position of the U.K. on capital account. The first is the so-called tf.a;terline balance§" (.1:.)02 h1llion on June 30, 1949. or aJJproximately $9 billion at the present rate of exchange), largely accumulated as a result of transactions with the United Kingdom by important suppliers of goods and services during World War II. (For details see Annex IV). The second is the purchase of U. S. dollars from the International Honetary Fund amounting to $300 million, interest payments on which will gradually increase until such time as the currency is sold back.  AliJNEX I External Debt of United Kingdom 1/ (Expressed in thousands of U.S. Dollars) ; I Principal Outstanding U.s. Dollar Debt Loan of 1945 (6/30/49) $3,750,000 E.C.A. Loan (6/30/49) 313,000 D.E.L.C. (6/30/49) 53 t 737 Lend-lease (6/30/49) 619,015 Total U.S. Dollar Debt 4,735,752 Canadian Dollar Debt g/ Loan of 1946 - Utilized Portion (10/31/49) Can. $1 t 115,OOO 1,009,053 Unutilized Portion (10/31/49) Can. $ 135.000 122,122 Total Canadian Dollar Debt 1,131.225 Total ,2,866.977 There are also the fol1ow;ng; R.E.C. Loan (9/30/49) ~I 120,907 Canadian non-interest bearing loan (3/31/49) Can. $297,079 268 t 8.51 "IVIiscellaneous Loans It J./ b 17,696 49,549 Purchase of U.S. Dollars from I.M.F. by U.K. . 300,000 739,307 Grand Total S/ 6,606,284 1/ Assuming no additional loans to those granted in 1948/49. g/ Converted at Can. $1 =U.S. $0.90498. J./ Listed under this heading in statement of British Treasury. No details available. l±! $14 million was paid off in the third quarter of 1949 on this loan t reducing the outstanding amount to $107 million, (The Economist, Records and Statistics. November .5, 1949.) i/ This excludes the folloWing: World 'var + Debt to U.S. Government Principal Unpaid 4,;368,000 Interest postponed and paya~le under moratorium agreements 131,,520 Interest accrued and unpaid under funding and moratorium agreements  ANNEX II Text of Haiver Clause and Other Selected Provisions in U.K. Loan Ag~~ ; 1. Y..Jh. Tre asury Loan (~greeme nt In any year in which the Government of the United Kingdom requests the Gover:nment of the United States to waive the amount of the interest due in the instalment of that year, the Government of the United States uill grant the waiver if:- (a) the Goverr~nt of the United Kingdom finds that a waiver is necessary in view of the present and prospective conditions of international exchange and the level of its gold and foreign ej~change reserves, and (b) the International l:Ionetary Fund certifies that the income of the United Kingdom from home-produced exports plus its net inconle frcm invisible current transactions in its balance of payments was on the average over the five preceding calendar years less than the average annual amount of United Kingdom imports during 1936-$ fixed at bS66,OCO,OOO, as such figure may 'be adjusted for changes in the price level of these importso Any amount in excess of ~43,750,OCO released or paid in any wear on account of sterling balances acmuuu· lated to the credit of overseas governments, monetary authorities and banks 'before the effective date of this Agreement shall be regarded as a capital transaction and therefore shall not be included in the above calculation of tbe net income from invi si ble current transactions for that year. If uaiver is requested for an interest payment prior to that due in 1955, the average income shaJJ. be computed for the calendar years from 1950 through the year pre- ceding that in \1hich the rec;::uest is made. (iii) Uaiver of interest will not be requested or allot-Jed under section 5 in any year unless the aggregate of the relea.ses or payments in that year of sterling balances acaumulated to the credit of over- seas governments, moneta~T authorities and baru{s (except in the case of colonial dependencies) refore the effective date of this Agreement is reduced proportionately, and unless interest payments due in that year on loans referred to in (ii) above are vlaived. The proportionate reduction of the releases or payments of stel"ling balances shall 1:e calculated in relation to the aggregate released and paid in the most recent year in Hhich \'laiver of interest 'Has not requested. (iv) The application of the principles set forth in this section shall be the subject of full consultation betueen the tvlO govel'l:'l1!lents as occasion may arise. 2. The OFLC (Surplus) Credit. This credit has the same waiver clause as the Loan of 1945, see 1. There is also the following provision:  'The Government ,of the United Kingdom agrees that, when requested by the Government of the United states from time to time prior to Deeember,Jl. 1951, it will transfer, in cash, pounds sterling to an aggregate dollar value not in excess of $50.000,000, at the exchange rates prevailing at the time of transfer, to be credited against the dollar payments due to the Government of the United states as principal under this settlement. ~he Government of the United states 1Ilill use tl1esepounds sterling exclusively to acquire land Or to acquire or construct buildings in the United Kingdom and the colonial dependencj,es for the use of the Government of the United states, and for carrying out educational programs in accordance with agreements to be con- cluded between the two Governments. J.. The Post-war Canadian Loan of Can. $1,250 million In any year in which the Government of the United Kingdom requests the Government of Oanada to waive the amount of the interest due in the instalment of that year, the Government of Canada will grant the waiver if:- (a) The Government ot the United Kingdom finds that a waiver is necessary in view of the present and prospective conditions of international exchange and the level of its gold and foreign exchange reserves; and (b) The International }.lonetary Fund certifies that the income of the United Kingdom from home-produced exports plus its net income from invisible current transactions in its balance of paJ~ents \'las on the average over the five preceding calendar years less than the average annual amount of United Kingdom imports during 1936-1938. fixed at 866 million pounds as such figure may be adjusted for changes in the price level of these imports. If waiver is requested for an interest payment prior to that due in 1955. the average income shall be computed for the calendar years from 1950 through the year preceding that in which the request is made; and (0) Interest payments due in that year on any credit made available to the Government of the Uni ted Kingdom to which a, similar provision for waiver of interest applies are also waived.  .AN1\J~ III ?:'J;te ViO,l'ld. IvaI' I Deqts During World War I the United Kingdom incurred an external debt. largely in the form of intergovernmental loans from the United states. In addition, some comparatively minor private credits were contr~cted all of which have since been paid off. By 1928, at which time all of the World War I inter- governmental debts had been finally determined, the external debt of the United Kingdom amounted to ~1~095 million. Of this amount, war loans from the United states Government accounted for ~920 million, loans from other Allied Governments for ~136 million and other foreign debts (later paid off) for I:.39 million. After having paid $1.2 billion in interest and $230 million in prinCipal On the World War I debts owed to the United States Government, the United Kingdom stopped payments following the Hoover Moratorium of 1931. At the Lausanne Conference of July 1932 all creditor nations of Germany, other than the U.S •• agreed to suspend all '\vorld War I debt payments subject to a revision in their debts to the U.S. No such revision ever took place and, insofar as the United Kingdom is concerned, no payments have been made since 1932, except token payments in 1933 and 1934. Beginning };larch 1946 the \Jorld \var 1 debts have not been included in the official public debt statements of thQ United Kingdom, but they are still listed in the U.S. Treasury Annual Reports which carried them as of June 30, 1949 for $4 4 billion on account of principal and $2.5 billion on account of 0 accrued interest.  ANNEX IV I .. U.K. STERLING LIABILITIES i , 11 (~ million) !fon-Sterling Sterling Area Area Countries Countrie~ Total - - 31 Dec. 1945 ·....................... 1,210 2,453 3,663 31 Dec. 1946 ·................. ....... " 1,283 2,417 3,700 31 Dec. 1947 • ••••••••• IJ .............. 1,284 2,288 3,572 30 June 1948 • ••••• " • lit • • • • • ., . . . . . . . . 1,1M. 2,400 3,552 31 Dec. 1948 ·.......... " .. " " .......... 1~037 2,322 3,359 30 June 1949 ••••••• 11 ••• "' ••••••••• 1,009 2,-224 3,233 11 Sterling liabilities comprise net liabilities of banks in the United Kingdom to their overseas offices and other account holders, including funds held as cover for overseas currencies, and certain liabilities of H.H. Government e:x:pressed in sterling or sterling area currencies. The capi tal value of payments due to India and Pakistan under the Pension Annuities Scheme of 1948 is included. Private holdings of securities and sterling balances of the International Honetary Fund and Bank are t excluded. Egypt, Sudan, Israel and Jordan are included in the llon- sterling area for the i:/ho1e period. Source: United Kingdom Balance of payments 1946 to 1949, Cmd. 7793.