None of the items here make cheering reading. The first two arise from the bombshell dropped by Morgan Stanley [ see “Mother’s-little-ray-of-realism” sent overnight]
As a reader tells me “Last night on a program on Fox Business the panel of experts voted the the UK the most likely next candidate for collapse, the reasons were as we already know is [that we are], over spent, over taxed, over regulated, and over borrowed and these trends are being accelerated.”
And there are still people who actively do what they can to foster the very hung parliament that would inevitably trigger such a collapse. I don’t think these people evil but accuse them instead of wilfiully refusing to face up to the likely consequences if they should be successful
We’re not alone - just the worst! (see posting still to come on Germany and Dubai)
Christina
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CITY AM 1.12.09
Hung parliament would fuel UK crisis
EDITOR’S LETTER ALLISTER HEATH
IT was certainly impeccable timing. A note yesterday from Morgan Stanley predicting fiscal carnage in Britain in the event of a hung parliament was released just hours before a ComRes opinion poll revealed a slump in the Tory vote. The chances of no party gaining overall control of the House of Commons had suddenly increased; an interesting piece of research had turned into a must-read.
It is obvious that a hung parliament (the first since 1974) would make it extremely difficult to tackle the poor state of Britain’s government finances, which is why Ronan Carr, an analyst at Morgan Stanley, believes a UK gilts and sterling crisis could be a very real possibility in 2010. This is hardly Morgan Stanley’s central forecast but the fact that the firm is now openly floating the possibility of such a disaster shows just how low the UK’s reputation has fallen. It is not Dubai that is worrying the more forward-thinking strategists – it is the possibility of a major, supposedly civilised nation such as the UK being engulfed in a debilitating debt crisis.
Growing fears over a hung parliament are likely to weigh on sterling and gilts in the months ahead; it would also increase the probability that some of the rating agencies will remove the UK’s AAA status, Carr believes. The situation is already dire: our deficit is among the worst in the world at 13.3 per cent of GDP in 2010; the Treasury is predicting net government debt will hit 79 per cent of GDP in 2013-14; the Bank of England could soon own a third of the gilt market.
In an extreme situation, Carr predicts, a fiscal crisis could lead to domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilise the currency, threatening the recovery. In such a scenario, Carr thinks sterling would crash by at least 10 per cent on a trade-weighted basis, the cost of insuring government debt on the credit default swaps market would surge and gilt yields would shoot up by at least 1.5 percentage points. It would cost less for firms such as BP, GlaxoSmithKline and Tesco to borrow on the debt markets than it would for the government.
The only good news is that UK equities may gain on balance from the slump in sterling. Just 35 per cent of UK stock market revenues come from the UK; 43 per cent come from other developed regions and 22 per cent from emerging markets. Around 47 per cent of UK market earnings are derived from companies that report in dollars; shareholders would gain if the pound slumped against the greenback, though it would be scant consolation for a bankrupt nation. We are not there yet, thank goodness; I still think we won’t be lumbered with a hung parliament. But food for thought nevertheless.
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TELEGRAPH 1.12.09
1. UK debt downgrade is a Tory nightmare
Never mind Dubai, Morgan Stanley has raised the spectre of a sovereign debt crisis in the UK. [See “Mother’s-little-ray-of-realism” sent overnight]
By Damian Reece
The bank's thesis is based on next year's election delivering a hung parliament and a weak government unable to tackle the soaring deficit.
Recent polls suggest David Cameron is doing well in key northern marginals, enough to deliver a comfortable victory. But even if he puts some clear blue water between the Tories and opposition he still risks waking up after an election night to the worst possible news – a downgrade, or threatened downgrade, to the UK's AAA debt status.
Again the answer is disclosure. Cameron must reveal in detail a plan to balance the budget, preferably before polling day to avoid allegations of perfidy afterwards, if he's to avoid the sort of nightmare prophesied by Morgan Stanley.
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2. Fears of credit card crisis as bank write-offs double
Fears that the banking system is facing a credit card timebomb were underlined as official figures showed that the amount of card debt banks have written off has unexpectedly doubled.
By Edmund Conway
In a sign that Britons are facing increasing difficulties keeping their finances under control, bad debts from credit cards leapt from £812m to £1.6bn in the third quarter, said the Bank of England.
The rise meant that the total amount written off by UK banks in that quarter was, at £4.3bn, a record. In the first nine months of the year, banks have already written off more than they did in the whole of 2008 - itself a record year for write-downs.
The news came as a surprise to banking experts, since most of the UK banks have reported that the outlook improved marginally in the third quarter. Although banks have already provisioned for significant losses, some will view the statistics as a sign of a potential second wave of difficulties for the banking sector. While most of the losses faced in the financial crisis were associated with US sub-prime lending and the closure of securitisation markets, some suspect there may follow major "home-grown" losses as UK households face higher unemployment and falling real wages.
The International Monetary Fund warned earlier this year of a potential credit card crisis in Europe as families default on their debts, predicting that up to 7pc of Europe's £1.49 trillion consumer debt could be written off, with the UK hardest hit.
The Bank also reported that households repaid a record amount of unsecured credit in October as they faced up to unprecedented credit card bills. It said net unsecured debt contracted by £579m. Its statistics also showed that its key measure of underlying money growth dropped by 0.7pc in October. The fall is a concern, since the Bank has repeatedly said that this measure will help show the success or otherwise of quantitative easing. However, a household-focused measure of money growth is still rising.
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