Tuesday, Dec 15, 2009
UK already downgraded - in real terms.
BBC News: There's been a lot of talk about UK losing its AAA rating. But guess what?, we already have...
'I've been taking a look at what's happened to the interest rate (yield) on UK government debt relative to other highly rated countries. The answer is highly instructive, if not a little depressing. UK gilts traded very close to the average of other AAA-rated countries for most of 2007 and 2008, as you'd expect. But this year a gap has opened up between us and the others.'
Posted by hpwatcher @ 05:02 PM (1805 views) Add Comment
13 Comments
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1. paul said...
Well at least our central bank hasn't been stupid enough to think they can substitute this source of capital by simply printing reams of money.
Oh hang on ...
2. cyril said...
I like the web address....
http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/12/overrated.html
3. drewster said...
"I'm Stephanie Flanders, the BBC's economics editor."
What happened to Robert Peston - I thought he was the economics editor?
4. drewster said...
Excellent article. Glad to see the bond markets are ignoring the ratings agencies, and that common sense prevails.
5. tenyearstogetmymoneyback said...
drewster
Robert Peston is the Business Editor but due to Stephanie being on maternity leave when all the action happened
covered most of the economics in 2008.
6. refusetobuy said...
This says as much about the currency as the credit rating. UK debt is repaid in sterling, so if the currency is expected to go down in the future then investors will demand greater interest.
7. alan said...
WSJ article on Sovereign debt (needs subscription) has similar content and focusses on Greece.
Link:
http://online.wsj.com/article/SB10001424052748704398304574597832779853024.html
Could it all get messy very quickly? Will we need to jack up IRs in a hurry?
8. drewster said...
@10years - thanks for the clarification, talk about unfortunate timing!
@refusetobuy - Sovereign debt and currency are almost the same thing. When the government prints fresh IOUs and sells them on the bond market, it's like printing fresh banknotes. Both are used as a store of value; both are highly liquid and tradeadble. If a company offers to pay a bill in gilts instead of in pounds, they will almost always be accepted at face value (or close to it). Both banknotes and IOUs are only worth what the government behind them is worth - it's impossible to conceive of a situation where the government would default on its sovereign debt while still retaining a viable currency. (It's different if the debt is not in your home currency).
What's surprising is that our currency stayed strong for so long while our debt piled up (remember those $2=£1 days in 2007-8?). What's even more surprising is that we can still get away with issuing debt in sterling - imagine the crisis we'd be in if our debt was denominated in gold!
9. drewster said...
alan,
The trouble is finding an alternative. Nothing looks particularly safe at the moment - whether it's currencies, debt, property, shares, oil, gold, etc; it all looks shaky and subject to random changes. If people flee from bonds, what will they flee into?
Until we start to experience 1970s-levels of inflation, governments have no need to raise rates. Inflation will still take a few years to pick up steam.
10. mken said...
Your starter for 10: what's the link to "mud, mud glorious mud"?
11. inbreda said...
9. drewster said...alan, If people flee from bonds, what will they flee into?
If people flee from bonds it is because they are concerned about inflation - the destruction of the currency - and they are likely to flee into gold.
12. mystie010 said...
I still think we are looking at the first interest rate rises around Feb/march next year I've said this for a while now - it's just a gut feeling or maybe even wishful thinking, but what I have learned over the years is expect the unexpected and things may just come to a head quicker than we thought.
13. Grizzley Bear said...
Drewster,
The markets are not random, but based on sentiment, and related patterns of human and machine behaviour, this can include self-fulfilled 'prophecies' for known price bar patterns.
Gold is not that shaky, you just need to be aware of seasonal trends, decide what time-scale to invest over, what you risk tolerance is, be patient for buying/selling opportunities, and control your fear and greed; this is not that hard if you look at graphs of Bullion prices over various time scales, learn some basic technical analysis techniques (e.g. via a 'Dummies' book), use a low fee Allocated Vault Gold, or EFT dealer, and accept and make allowance for mistakes. Even a cautious, buy low sell high, policy can provide decent profits in Gold.
I use BullionVault graphs, and http://aiotrade.com/, with GOLD and SLV symbols, to track Gold and Silver prices, the later because it includes volume, which can be a confirmation for trends.
It will soon be possible for new traders to buy Allocated Vault Silver at BullionVault, at low trading cost, but higher storage costs; as an existing trader I have already claimed this option, given Silver may become more profitable than Gold.