Britannia Radio

Red ink and a black hole are not good news.  But Brown is in denial  
and he must know that he has to keep the ‘show on the road’ at least  
until he has to meet the voters.  After that, win or lose, he isn’t  
going to worry.

The test of the immediate Gilts crisis will come at the next  
auction.  If that is not a success then we are in deep and worsening  
trouble.  If they pull it off we shall live to face the next crisis.  
battered but still standing!
xxxxxxxxxxxxxx cs
===============================
TELEGRAPH                   26.3.09
It's time to call a halt, Prime Minister
Mervyn King was right to attack the Prime Minister's economic plans  
in advance of the G20 summit, says Edmund Conway

   For Gordon Brown, treachery and transatlantic flights go hand-in- 
hand. It was at 36,000 feet over the North Atlantic that he learnt  
five years ago that Tony Blair intended to serve a full term as Prime  
Minister – an episode described by his advisers as resembling "an  
African coup". And this week, as the flight taking Brown to New York  
for the next stage of his world tour to promote the G20 summit taxied  
on to the runway, his lackeys had to deliver the bad news that his  
plans to stage another multi-billion-pound economic bail-out had been  
all but dismantled in his absence. If there were any doubt about the  
fragility of Britain's finances, it was dispelled less than 24 hours  
later, when the Government failed for the first time in well over a  
decade to sell a full tranche of its debt to private investors.

What had the Prime Minister scowling his way through the in-flight  
movies, however, was that the man to plant the dagger was none other  
than the Governor of the Bank of England, a man he himself had  
appointed. Speaking to the Treasury Select Committee, Mervyn King  
delivered a withering verdict: there simply is no way Britain can  
afford a big set of tax cuts or spending increases. To Brown, a man  
not immune to the occasional whiff of paranoia, it must have felt  
like a second African coup – particularly when he discovered that  
King went straight from the Palace of Westminster to Buckingham  
Palace for a private audience with the Queen.

Some have depicted this as a personal feud between Number 10 and  
Threadneedle Street. There is indeed plenty of evidence to suggest  
that relations between King and Brown haven't exactly been clement  
for a while. This stems mainly from the manner in which the Prime  
Minister left it gratuitously and tantalisingly late before  
reappointing King for a second five-year term. But this is not merely  
a clash of individuals: it is a clash between economics and politics.

Keenly aware of the impending election, Brown would like both to  
engineer a swift recovery for Britain and to cast himself as the  
global economic saviour – which is where the G20 comes in. The Bank,  
and more importantly the Treasury's senior civil servants and  
economists, object that there is simply no room for manoeuvre left.  
Similarly, Brown would like to portray the financial crisis as a  
result of bankers' greed and economic problems brewed up overseas;  
everyone else, including the chairman of the Financial Services  
Authority, acknowledges that it stemmed just as much from mistakes  
made by regulators and politicians here.

The problem for the Prime Minister is that people like Mervyn King  
don't think in normal timescales. Much like an astrophysicist whose  
brain constantly functions in four dimensions, King is focused not on  
the next move in this fiscal chess game, but five, six, seven moves  
ahead.

Frightening as the failure of the gilt auction yesterday was, the  
real horror lies some months or even years ahead. It will come after  
the Government has already borrowed two, three, four hundred billion  
more, when the Bank is no longer buying gilts to finance  
"quantitative easing" but is getting rid of them, on top of those  
being sold as part of the Government's usual borrowing. But at that  
point, investors should be piling back into the stock market, and  
will no longer be willing to splash out on safer government debt.  
Thus, the Nightmare on Threadneedle Street really begins.

How will it unfold? Even in the best-case scenario, the vastly  
increased size of the public debt, alongside investors' unwillingness  
to fund it at anything like the present interest rates, will push up  
financing costs for the Government. That sounds pretty harmless,  
until you realise that when the Government has to pay higher interest  
rates, the rest of us do, too. At worst, investors from home and  
overseas will simply give up on funding the UK. Sick and tired of  
pouring cash into a currency whose controllers are intent on over- 
borrowing and, one presumes, inflating that debt away in the future,  
they will simply abandon ship. When that money dries up, the UK will  
be left rather like Iceland – except that our accumulated debts are  
so big that not even the International Monetary Fund could afford to  
mop them up.

The trembling Treasury troglodytes know that this scenario is quite  
possible, whatever goes into next month's Budget. They – and King –  
saw it looming last November, as they drew up what they hoped would  
be a relatively cautious Pre-Budget Report, only for Brown to storm  
in and impose a VAT cut at the last minute. Their fears have been  
confirmed each month since, as the public finances have been engulfed  
in a tide of red ink.

A vast black hole  has opened up in the Government's books – and it  
is one completely beyond its control. The nastiest surprise has been  
less the billions that we are having to spend on unemployment  
benefits for those who have lost their jobs, but the sheer amount  
foregone in tax revenues in
the wake of the City's collapse. No wonder Brown and Blair were so  
accommodating towards bankers in years gone by: it turns out that  
they were propping up the entire income tax system.

At such a precarious moment, it is questionable whether the public  
finances could put up with more debt. This is the point King made so  
eloquently in Parliament: they could survive a few billion here and  
there to help the savers and the poorer families who have been the  
most unfortunate victims of the crisis, but nothing on the scale of  
the plan unveiled by Barack Obama recently, nor the £90 billion plan  
that David "Danny" Blanchflower, the Bank of England policymaker,  
suggested earlier this week.

That this needn't be a disaster is largely down to the good work King  
has done. To the disgust of many, he has slashed interest rates to  
unprecedented lows, so imposing on the pound the biggest devaluation  
in the modern era. Central bank governors don't do this kind of thing  
lightly. But in so doing, King has set Britain up to benefit  
disproportionately when the recovery finally comes.

The UK is temporarily in the worst of both worlds, with, as we saw  
earlier this week, the weakness of the pound pushing inflation  
higher, without any corresponding benefit from increased trade. But  
as the world economy recovers, and as international manufacturers and  
consumers realise that British goods and labour have just become a  
third cheaper, the UK can begin its long road back to health.

The catch is that this cannot happen without any demand for goods at  
all. The idea behind the G20 is to persuade the countries with the  
mountains of reserves – Germany, Japan and China – to spend as much  
as possible to ensure their economies do not slide into an  
unnecessarily deep trough. This is being urged partly because the  
first two are facing a recession far worse than the UK this year –  
but also, more selfishly, because it means that they will recover  
sooner, and so will their appetite for exports, hopefully from the UK.

All of which provokes a rather horrifying thought: what if King has,  
rather unwittingly, just derailed Brown and Obama's grand plan to  
prevent a global depression? The host of the G20 can hardly berate  
his fellow leaders for not splurging if they know he cannot or will  
not do likewise. What if Brown's reported keenness for fiscal  
stimulus in the UK was a sign not of economic illiteracy or political  
expediency, but shrewd diplomatic manoeuvring? What if his decision  
to postpone the Budget until after the G20 was not to provide a  
smokescreen to raise taxes, but to seal the global rescue plan before  
the paltry reality of his own non-giveaway was uncovered? Might King  
have just scuppered this well-laid plan?

Only if you believe in fairy tales: this version of events would go  
against everything we know about the Prime Minister; against every  
shred of gossip and evidence from Whitehall and beyond; against all  
the hints he himself has laid down. Instead, King's intervention  
underlines how courageous he has been to stand in the face of this  
and tell Brown the simple truth: enough is enough.
============
2. Britain fails to sell its bonds: Chilling moment for Gordon Brown
This was not meant to happen. A rich country like Britain is simply  
not supposed to have trouble selling its debt in the capital markets.

    By Edmund Conway    

Britain’s very existence as a developed, sophisticated democracy  
depends more or less directly on its ability to finance itself by  
selling debt.
Understand this and the open-mouthed faces you might have seen had  
you been anywhere near the City’s trading floors on Wednesday will  
have made sense.

The fear those faces betrayed tells a simple story: this crisis is  
proving to be an expensive business.

Governments around the world are having to borrow more cash than ever  
before. Fine, provided there is an appetite for all this debt.

Until Wednesday, most of the recent auctions of government bonds – or  
as Britain calls them, gilts – were oversubscribed.

But when markets no longer want your debt, you risk having to be  
bailed out by another country or the IMF. Both are baleful prospects.

Thankfully, Wednesday’s auction was most likely a blip – a result of  
markets being jittery, and suspicious that the Bank of England may  
not buy as many gilts as originally thought in its rescue plan.

The Government is not facing an Iceland-style capital strike as  
investors abandon its debt. Yet.

But it was an eerie warning: should the Government’s economic  
credibility deteriorate much further, it faces not the odd one or two  
but a series of failed gilt auctions.

And only then as a prelude to a possible slide into insolvency.