21.5.09

SCOTCH ON THE ROCKS

The UK’s massively indebted government took a body blow from the financiers, one influential ratings agency signaling its fear that the UK is borrowing more than it can afford.

"Sell Sloanes," cried the FT, referring to the well-heeled residents of London's poshest borough. Kensington and Chelsea risks losing its top-rated borrower status, along with the UK.

The ratings agency Standard and Poors lowered its outlook on the UK from stable to negative.

Specifically, S&P has concerns about how quickly the UK can repair its balance sheet - given the loss of tax revenues and the failure to cut spending.

HIGH ON HOGMANAY

The UK Treasury says it's already thought of that.

"The Budget set out a clear plan to halve the deficit in five years. That judgement was based on a deliberately cautious view of the public finances," the Treasury told Reuters.

But just a day ago UK finance minister Darling Alistair was saying the recession would be over by the year's end. In place of bowler-hatted caution, the minister is getting high on hogmanay.

AFLOAT WITH ICEBERGS

Darling is one half of the Scottish double act in 10 and 11 Downing Street. Together they are steering the UK towards the rocks. Economist George Magnus of UBS in the FT says they're not alone. The world's bankers and politicians are trying to accelerate their economies in a sea afloat with icebergs:

* The structural credit system dysfunction in advanced economies hasn’t been fixed yet.
* The great debt restructuring, especially of mortgages, has barely begun.
* Optimism about emerging markets has to be tempered to the extent that they rely on exports to western consumers, whose spending and borrowing will remain subdued.


The UK government plans to borrow 220 Billion pounds this financial year. And the need to hold a general election next year has clearly influenced the Treasury not to cut public spending or boost taxes by enough to plug the deficit.

HIGHER INTEREST RATES

The ratings warning spooked the markets. Yields on the 10-year gilt rose as UK bonds sold off, touching 4.5% before falling back to 3.6%.

The spread over German bunds widened to more than 20 basis points. Until last month, bunds yielded more than gilts. You can see the potential for a nasty rise in interest rates, even without higher inflation.

TWIST THAT THUMB

Like fund managers, the UK treasury will be hoping to do as badly as everybody else.

If the UK sticks out like a sore thumb, the markets will twist that thumb with a vengeance.

Speaking to Bloomberg, Gary Jenkins, head of credit research at Evolution Securities, in London, said: “The key from a market perspective is whether this is a stand-alone U.K. problem or whether it is the start of a trend where the agencies start to review the ratings of various sovereigns across the developed world. If this is really just a case of the U.K. deteriorating as a credit then it could have a significant impact.”

Bloomberg sums up Britain's position, using IMF data:

The U.K.’s debt load next year will be 66.9 percent of GDP, exceeding Canada’s 29.1 percent and Germany’s 58.1 percent. The U.S. will be at 70.4 percent, and the 16-nation euro area at 69 percent.

No comments: