Failure to pay our European creditors is not a first for the English, as our medieval past shows. What has gone before reveals the damaging consequences of not paying our Brexit bill, write Henley Business School’s Professor Adrian Bell, Professor Chris Brooks and Dr Tony Moore in a recent post for The Conversation.
Boris Johnson’s threat to withhold payment of the UK’s £39 billion Brexit divorce bill until the EU gives Britain better exit terms has been the source of much debate over whether or not it constitutes a sovereign debt default.
Technically, the UK would argue that this is not a debt, as normally described when referring to sovereign defaults. Nevertheless, if the EU did consider it such a default, then the consequences would be very clear. They could include a hit to the UK’s credit rating, its scope for future borrowing at reasonable rates, and access to international markets.
History shows us how the UK could get away with not paying its bill in the short term – indeed, there is very little the EU can do about it. But history also tells us that it could have longer term, detrimental effects on the country’s economy.
Not a first for England
The UK actually has a history of defaulting on payments it owes to European creditors. Or, to be precise, Medieval England (before the UK was a unified nation) does. Our research on credit finance in the Middle Ages shows that England was one of the first sovereigns to default on its international debt obligations.
Edward I, king of England between 1272 and 1307, entered into a long-term banking relationship with an Italian merchant society, the Ricciardi of Lucca. Unfortunately, the outbreak of war between England and France in 1294 led to a “credit crunch” in international money markets and when Edward sought financial support from the Ricciardi, they were unable to advance him any funds. In response, Edward seized the Ricciardi’s assets in England, effectively bankrupting them.
In some ways, it looks like Edward managed the situation decisively. He cut ties with the Ricciardi and recovered some of the money deposited with them. But this is misleading. To fund the war with France, Edward was forced to turn to moneylenders who both lacked the resources of the Italians and charged much higher rates of interest (40%-80% per annum).
Without access to international credit, Edward had to levy heavy and repeated taxation on England, amounting to as much as £280,000 – seven times the English crown’s ordinary annual income of about £40,000 – over the course of the war. This heavy taxation contributed to a constitutional crisis in 1297. Edward also had to issue wardrobe bills, effectively government IOUs, and as much as £200,000 worth of these may still have been outstanding at his death, ten years later.
Serious repercussions
Although Edward was able to find another Italian merchant society, the Frescobaldi of Florence, willing to act as royal bankers, he had to pay a heavy price. The Frescobaldi later complained that their involvement with Edward had led to a run on their bank as, internationally, Edward was considered a sub-prime borrower and the bank’s depositors were concerned that he would bankrupt them in the same way he had the Ricciardi.
Edward recognised the justice of their claim and promised the Frescobaldi £10,000 in compensation for their damages. In today’s money, this commitment was arguably even greater than the current £39 billion divorce bill.
Edward’s treatment of the Ricciardi thus had serious medium-term repercussions for his government and the wider English economy. In the same way, any brash moves from Britain today would likely reduce the availability of future borrowing. And, given the greater reliance of the modern economy on credit, this would have much more serious consequences for the country as a whole.
Legally speaking, if a country refuses to pay a debt it owes, this is known as repudiation. When countries say they do not recognise the claim as legitimate, they consider themselves morally and legally right not to pay the debt, which they say does not exist.
It is true that the EU would only have limited remedies if Britain simply refused to pay its Brexit bill. However, any such unilateral action may damage Britain’s reputation, leading other international partners to think twice before entering into any future agreements with the UK. This would be particularly damaging at a time when the UK must negotiate new trade deals to replace that with the EU.
Despite its chequered medieval history, the UK has maintained a sterling credit rating since the 18th century. But to paraphrase Warren Buffet, the successful US investor, “It takes [300] years to build a reputation and five minutes to ruin it.”
This post first appeared on The Conversation, 13 June 2019.
Professor Adrian Bell is Chair in the History of Finance at Henley Business School’s ICMA Centre and University of Reading’s Research Dean for Prosperity and Resilience. He is interested in the history of finance and has just completed a major project funded by the Leverhulme Trust with Professor Chris Brooks and Dr Helen Killick: “The first real estate bubble: Land Prices and Rents in Medieval England c. 1200-1550” . The project builds upon a previous project for Leverhume with Professor Chris Brooks and Dr Tony Moore on medieval foreign exchange.
Chris Brookes is Professor of Finance at Henley Business School’s ICMA Centre. His research interests include asset pricing, fund management, behavioural finance, financial history, and econometric analysis and modelling in finance and real estate.
Dr Tony Moore is Lecturer in Finance at the ICMA Centre. His chief research areas are the history of finance and medieval history – and especially the history of finance during the Middle Ages. He is series editor of Palgrave Studies in the History of Finance.