Credit Card Government

FRIDAY, JANUARY 29, 2010

Credit Card Government

Hope you've got those scissors ready George

It looks very much like the Cradle of Civilisation is going down. According to this morning's FT:

"...anxiety over Greece rose in financial markets, driving Greek bond yields up to 7.25 per cent, closing on Hungary, a non-eurozone state bailed out by the EU and the IMF in 2008.

Greek yields have risen by more than one percentage point this week and by three percentage points since October. 

George Papandreou, Greece’s prime minister, blamed “malicious forces” for stories about Athens seeking funds from China and elsewhere, which helped trigger the turmoil...  investors warned they might shun Greek debt, accusing Greek ministers and bankers of mishandling the bond issue, which left some funds nursing heavy losses."

Luckily for the Greeks, the EU will not let them fail, and is putting together a bail-out. Unluckily for the Greeks, the EU (aka the Germans) will insist on huge and immediate spending cuts and tax increases. The Greek government has lost control of the situation, and Greece may well be made an example of, specifically to encourage the other PIGS, especially Portugal and Spain.

Dr Doom puts it this way:

"If Greece goes under that's a problem for the eurozone. If Spain goes under it's a disaster."

Jose Luis Zapatero, Spain's premier, assures us there isn't a problem:

"Spanish public debt (52pc of GDP) is 20pc lower than Europe's average; our treasury spends 5pc of revenues on debt costs, less than France and Germany."

Which is very interesting. 

Because on that basis, Spain looks like a paragon of fiscal virtue compared to you know who.

We've looked at the following comparison chart before, but this time we've added Spain. It shows the OECD's latest estimate of structural fiscal deficits (ie the bit of the government deficit that will not disappear automatically when the recession ends). And as we can see, when it comes to borrowing, the UK is by far the worst of the bunch, worse even than the PIGS:

Now, it is true that Portugal, Italy, and Greece are all currently worse than us in terms of debt outstanding, but we're catching up fast (see yesterday's blog on the Ring of Fire). And as Zapatero says, Spain's outstanding debt is actually lowerthan other countries, including us. According to the OECD, Spain's gross government debt is currently 67% of GDP (2010), whereas ours is 83% (remembering of course that this is just our official debt, excluding all the off-balance sheet Enron items).

And Zapatero also points to the importance of the debt interest burden - how much of the government's revenue has to go on paying interest costs. In Spain's case it's a relatively comfortable 5%, and that was roughly where we were before the bubble burst. Unfortunately, our debt interest burden is now escalating wildly. According to the Pre-Budget Report, it will reach 8.6% in 2010-11, and the IFS estimates it will reach 9.5% the following year.

Again, we've blogged this many times, under its more usual soubriquet The Doomsday Machine. The point that needs to be underlined is that for the last several years, our government has effectively enjoyed a debt holiday. The golden legacy inherited by Labour in 1997 included buoyant tax revenues and falling gilt yields (strongly reinforced by, yes, their decision on Bank of England independence - a confidence building measure that brought an immediate dividend in terms of lower gilt yields). Unfortunately, that holiday has now come to a sudden juddering halt:

Make no mistake, this is a turnaround of historic proportions. For four whole decades following WW2, British taxpayers struggled under the burden of the War's massive cost. An average 12% of our taxes - one pound in every eight - wentnot on providing public services, but simply on paying debt interest.

My friends, we are now headed right back to where we started. And this time, in a world of globalised PIMCO markets, and no exchange controls, we are going to find that the consequences in terms of HMG's borrowing costs are much worse than they were in the 40s and 50s.

George, please, pleeeease, don't blow it in July. As the FT reports, the interest rate on Greek debt has jumped 1% in a week, and is up 3% in the last three months. If you fail to grip the problem at the first attempt, that could easily happen to us - or much worse.

Do you really want to be remembered like poor old Badger, forever frozen in the TV lights outside HMT on the day the Pound finally did expire? Much better to be remembered as a tough bastard, hated by everyone, but the man who sorted our credit card bill and got us back on track to prosperity.

PS Global beer giant SABMiller is one of the big employers near Tyler Towers. Unfortunately it is now joining the corporate stampede from the UK. Their CEO says: "One of the things that attracted SAB Miller to move its HQ to London and to list on the LSE in 1999 was the liberal and predictable tax regime. That's no longer the case. Today the tax system is not predictable and there have been numerous increases, particularly when it comes to personal taxation. This means that as a global company we are no longer able to attract our best global talent to the UK. Why would someone move from Hong Kong where the marginal tax rate is 15 per cent and come to the UK where it is closer to 52 per cent. Taxation was a key part of our decision to locate a new global procurement business not in the UK but in Zug in Switzerland." George, that ticking noise is getting a lot louder.

THURSDAY, JANUARY 28, 2010

Talent

We've just taken a quick look at the National Audit Office's new report on the BBC. They've probed the costs incurred in covering major sports and music events, and they come up with some interesting stats.

How many BBC staff went to the bunfight in Beijing in 2008? 

A staggering 491 - even though all the main pictures (including that fake opening ceremony) were supplied by Chinese TV.

Glastonbury - 277

The Proms - 145

But as always, the really interesting bit is what they choose to pay the... er,"talent". And as always, the tax-funded state broadcaster refuses to tell us:

"Following legal advice, the BBC Trust has asked that the National Audit Office not disclose the aggregate figure for talent costs for each event. It believes that in this case such aggregate disclosure, when combined with other information the Trust believes to be either in the public domain or potentially available, could constitute disclosure of talent fees for individuals, which would be in breach of the Data Protection Act."

All the NAO will say is:

"The cost of talent (presenters and commentators) can be a significant element of coverage expenditure, particularly for the events covered by BBC Sport. The cost of talent was either two or three per cent of total coverage costs for music events and between six and 20 per cent for sporting events."

They also tell us that the combined cost of staff and talent at Beijing was £3.6m (plus another £2m on travel and accommodation). And the total coverage cost was £15.6m. So the talent cost was in the range £0.9m to £3.1m.

That's for three weeks work. 

And who were "the talent" exactly? Alan Partridge of course, but who else?

Yes I know I've said it before, but WTF do I have to pay for it?

Resting On A Bed Of Nitroglycerin In The Ring Of Fire

Are you sitting comfortably? Then we'll begin.

As you may have already seen, the world's biggest and most influential bond manager has just passed a further and even more terrifying judgement on our precarious financial position (see this blog for previous warning). He now says:

"The UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower."

He describes us as sitting in “The Ring of Fire”:

"These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years’ time, which would slow GDP by 1% or more. The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth."

And here's his pic:

Now OK, we're not the only ones in The Ring. But we are the ones whose debt position is deteriorating most rapidly, simply because we have the highest annual borrowing. And some of our Ring companions, like Greece, are already starting to smoulder alarmingly. 
  
The thing is, PIMCO's Bill Gross is not some small government fanatic like Tyler. He's not saying this because he's trying somehow to bludgeon HMG into cutting back the state. He's saying it because that's what PIMCO's analysis shows. And yes, he's almost certainly already sold his gilts so to that extent his statement can be seen as self-serving. And his chart is obviously dressed to impress. But if you think he's blagging, just read his newsletter.

So what does HMG have to say?

Treasury Minister and all-round decent man, Stephen Timms says:

"That company has made rather similar comments in the past. It is entirely untrue. We have continued to see a good level of demand for gilts. I only point to the fact that our auctions have been well covered and I am confident that we will continue to meet our needs." 

Well, Tyler would probably say the same in Timms' shoes.

But the head of the government's Debt Management Office - the guys actually responsible for selling the £200bn+ of gilts HMG will need to flog every year from now to eternity - doesn't sound quite so sure. He tells the FT he's worried about the end of Quantitative Easing, the Bank of England's programme to fund the fiscal deficit by printing money:

“We are in a transitional phase in as much as nobody in the market knows what the next step of the Bank of England will be. That transitional phase is always going to be a pivotal moment for the market. We are moving from one state to another and that could increase the short-term uncertainty un-til it is clear what the MPC has decided on as their next course of action. It could mean we move into a different pricing environment.” 

A different pricing environment, huh? That's certainly another way to describe a Ring of Fire.

Let's hope George and Cam are taking this in. Because although nobody expects the current bunch of clowns to do anything sensible about our debt, the markets won't be so forgiving with the new team. They will be looking for action, not talk.