1. another alan said...

You need to subscribe to read it all. If anyone does, can you copy the story here please. Thanks.

3. little professor said...

Not a subscriber, but the full text is available if you follow the link to the article from Google.

Just when you thought it was safe to get back in the U.K. water ...

The pound has soared more than 15% against the dollar over recent weeks on signs of returning economic confidence. But that rally stopped in its tracks on Thursday, when Standard & Poor's threatened to downgrade the U.K.'s coveted triple-A rating, putting the country on negative outlook for the first time ever. It was a reminder that the risks to the pound and U.K. government bonds, called gilts, remain immense.

S&P's move came as a surprise to the market, but the reasons behind it weren't. U.K. public finances are in a dire state. The government's April budget combined optimistic forecasts with a refusal to spell out how the deficit might be controlled.

The U.K. Treasury forecasts conveniently showed debt peaking at 79% of gross domestic product, just under the 80% level that would usually trigger a downgrade. But S&P doesn't agree. It expects U.K. borrowing to hit 100% of GDP and remain there for many years, based on a taxpayer bill for bailing out the banks of roughly twice the Treasury's estimates.
[gilt complex]

It is possible to paint a bullish picture for the U.K. It has a relatively open and flexible economy, showing some signs of responding to huge stimulus. House prices and retail sales show signs of stabilizing. It has an accommodative central bank, buying up gilts as fast as the Treasury can issue them. And a general election is due by next June that, on current polls, would install a Conservative government. Indeed, S&P has specifically linked its rating to the fiscal policies of the next government.

But plenty could go wrong this side of the election. The recovery may be slower than expected, blowing a hole in the government's borrowing forecasts. Or the Bank of England may call time on quantitative easing, leaving the government to finance its debt without the support of a huge buyer. Either might lead to failed gilt auctions and higher yields.

No one knows where the breaking point might be. The Treasury was last year warned by its own broker that it might struggle to sell more than £100 billion ($157.5 billion) of gilts. In the end, the market absorbed £140 billion, albeit against a backdrop of extreme risk aversion.

Much depends on foreign investors, who have been absorbing a growing share of gilt issuance. But they also are the investors most likely to be influenced by a rating decision.

S&P's action is a warning shot to the U.K. political class, already in turmoil because of a scandal involving expenses, saying that it can't duck an urgent debate over the U.K.'s finances. But it should also be one to other countries, the U.S. included, that they can't expect to continue running up vast deficits without consequences.

5. japanese uncle said...

My hunch tells that there will be another series of run on the GBP sooner rather than later, which should trigger IR hike, as I can see only CHAOS on the menu. Given another 30% HP drop (a very very conservative scenario), what would happen to the banks' balance sheet and to this economy as a whole? So called experts are none short of ostriches with their heads in the sand, just trying not to think about the most unavoidable. Jobless population is likely to reach 3.5 million or even 4 million. And the government is proven to be totally incapable of handling the situation, too busy making fraudulent expense claims. Pathetic!

7. bellwether said...

It is all timeframes however, we might wait months or more £ to crater.

Thinking the pound looks likely to remain strongish in the near terms and totally shrugged off the S+P and IMF statements this week, despite already looking overbought against the $ and despite having risen in more or less in a straightline against the $ since I think 22/4. It just shows I guess that momentum in markets is what really matters.

Even my "judicious" short against sterling this morning (thinking it is bound to retrace a bit) having started well is begining to look dicey.

9. refusetobuy said...

Our debt is enormous (+100% of GDP) if you include off balance sheet items like PFI, Network rail, pensions etc.
Anyone know how Germany/France etc. compare if they add on their off balance sheet items?