This week the Telegraph carried a piece by Roger Bootle full of vacant optimism. I fail to see where the optimism is coming from and with polls threatening a hung-parliament, whether or not that happens the mere threat destabilises the markets. Those foolish few amongst my readers who can’t see this are themselves doing damage to Britain NOW. Thanks for the support from most!
Certainly Evans-Pritchard is hardly mother’s-little-ray-of-sunshine here and his warnings should be taken seriously. To stay in recession while we painfully pay back all the money Brown continues to squander is a lesser price (though a heavy one) than facing sovereign default.
Christina
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TELEGRAPH 1.12.09
1. Morgan Stanley fears UK sovereign debt crisis in 2010
Britain risks becoming the first country in the G10 bloc of major economies to risk capital flight and a full-blown debt crisis over coming months, according to a client note by Morgan Stanley.
By Ambrose Evans-Pritchard
The US investment bank said there is a danger Britain’s toxic mix of problems will come to a head as soon as next year, triggered by fears that Westminster may prove unable to restore fiscal credibility.
“Growing fears over a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK's AAA status,” said the report, written by the bank’s European investment team of Ronan Carr, Teun Draaisma, and Graham Secker.
“In an extreme situation a fiscal crisis could lead to some 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 stabilize the currency, threatening the fragile economic recovery,” they said.
Morgan Stanley said that such a chain of events could drive up yields on 10-year UK gilts by 150 basis points. This would raise borrowing costs to well over 5pc - the sort of level now confronting Greece, and far higher than costs for Italy, Mexico, or Brazil.
High-grade debt from companies such as BP, GSK, or Tesco might command a lower risk premium than UK sovereign debt, once an unthinkable state of affairs.
A spike in bond yields would greatly complicate the task of funding Britain’s budget deficit, expected to be the worst of the OECD group next year at 13.3pc of GDP.
Investors have been fretting privately for some time that the Bank might have to raise rates before it is ready -- risking a double-dip recession, and an incipient compound-debt spiral – but this the first time a major global investment house has issued such a stark warning.
No G10 country has seen its ability to provide emergency stimulus seriously constrained by outside forces since the credit crisis began. It is unclear how markets would respond if they began to question the efficacy of state power.
Morgan Stanley said sterling may fall a further 10pc in trade-weighted terms. This would complete the steepest slide in the pound since the industrial revolution, exceeding the 30pc drop from peak to trough after Britain was driven off the Gold Standard in cataclysmic circumstances in 1931.
UK equities would perform reasonably well. Some 65pc of earnings from FTSE companies come from overseas, so they would enjoy a currency windfall gain.
While the report – “Tougher Times in 2010” – is not linked to the Dubai debacle, it is a reminder that countries merely bought time during the crisis by resorting to fiscal stimulus and shunting private losses onto public books. The rescues – though necessary – have not resolved the underlying debt problem. They have storied up a second set of difficulties by degrading sovereign debt across much of the world.
Morgan Stanley said Britain’s travails are one of three “surprises” to expect in 2010. The other two are a dollar rebound, and strong performance by pharmaceutical stocks.
David Buik, from BGC Partners, said Britain is in particularly bad shape because the tax-take is highly leveraged to the global economic cycle: financial services provided 27pc of revenue in the boom, but has since collapsed.
The UK [er - Brown! -cs] failed to put aside money in the fat years to offset this time-honoured fiscal cycle. It ran a budget deficit of 3pc of GPD at the peak of the boom when prudent countries such as Finland and even Spain were running a surplus of over 2pc.
“We need to raise VAT to 20pc and make seriously dramatic cuts in services that go beyond anything that Alistair Darling or David Cameron are talking about. Nobody seems to have the courage to face up to this,” said Mr Buik.
The report coincided with news that Britain is now officially the only G20 country still to be in recession. Canada reported that its economy grew by 0.1pc in the third quarter. Britain, by contrast, shrank by 0.3pc, the latest estimates show.
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2. (Blog) The leaks that prove how worried the Treasury is
By Edmund Conway
Leaks before the pre-Budget report are nothing new. Usually in the weeks that precede the Treasury’s two big set pieces each year you will see some tit-bits dribbling out in the press. The inclination is to blame this on New Labour and its spin operation, but in fairness the Conservatives were hardly guiltless in the preceding years either.
But it strikes me the tenor and theme of the leaks this time around have been rather different. Usually the press is reticent about this, for obvious reasons: they themselves are a part of the process. But the nature of the leaks this time around ought to be examined because they tell us something very important about the atmosphere at the Treasury. They tell us that the Treasury is nervous – very nervous indeed.
Let me explain: usually ahead of the big day we can expect a few details of particular tax measures: sometimes these will be smaller measures likely to be overshadowed on the day by the big announcements; sometimes they will be big eye-catching changes to tax. However, the Treasury has always in the past taken a different approach when it comes to the economic side of the Budget.
In recent years, if you tried to press the Treasury on what they planned to do with either their economic forecasts for the next couple of years or the borrowing forecasts, the line trotted out would be something like “we don’t comment on the economic forecasts – they will be updated in the Budget/pre-Budget report”. After all, that kind of information was directly market-sensitive, or at least much more so than stuff about taxes and spending plans. Leaking economic forecasts, the implication went, was fine if you’re the Italian finance ministry, but not something Her Majesty’s Treasury would ever contemplate.
Not anymore. Last week there was a spate of newspaper and news wire reports about what the Chancellor would do with his economic forecasts in the PBR. Strikingly, these reports weren’t based on guesswork, but on the word of “Treasury officials”. Indeed, according to the Reuters version, they even provided information about when they considered the recession ended. Reuters said: “‘The assumption is that the economy grew between 0.2 (percent) and 0.4 percent in Q4,’ one Treasury source said.”
Since then, there have been a variety of apparent leaks over the weekend, with, again, many of them focusing either on the economic forecasts or the borrowing projections (there will, apparently, be no borrowing undershoot, judging from these).
The significance of this should not be underplayed. The Treasury, it appears, is going to the extent of leaking market-sensitive details of the forecasts in the PBR because, one presumes, it is extremely worried about the market’s reaction to the red book itself. This probably shouldn’t be surprising: we all know full well that the UK is heading into unknown territory when it comes to its fiscal position: total UK net debt is set to rocket from around 50pc of gross domestic product to close to 100pc in the next few years. As the Dubai saga has shown, there is now major concern over public sector balance sheets, and a question mark over the appetite investors will have for UK debt in the future.
Perhaps in such circumstances, a little bit of leaking is acceptable if it means preventing a “sudden stop” in the gilts market. But I have to say, I don’t much like it. It’s all a far cry from 1947, when Hugh Dalton resigned as Chancellor after it emerged that, on his way to Parliament on Budget day, he had divulged his plans to a lobby journalist.
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