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laurejon

Standard An Poor Rate Gordon Browns Economic Miracle

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Following Standard and Poors Rating of the UK, the world of Global Finance is now making moves to pull money out of the UK and invest in safer havens such as Kenya, Argentina, Japan and Zimbabwe.

The economic extremist New Labour Party is now seen by the world as an organisation that is no longer capable of managing the economy. Having taken the UK to the brink of Bankruptcy the Global Markets are now responding by pulling out of the UK seeing it as a very high risk of default.

Gordon Brown's refusal to call a general election is now having a serious impact on the UK's credibility in the Global Markets, interest rates are now predicted to go double digit when the overseas investors dump the UK Governments bond issues as they are seen as very high risk, with a very possible default as the UK goes into behind closed doors with the IMF.

The Global community see a general election as the only solution to the current problem, however it is rumoured that despite repeated warnings about the mass exodus of foreign investment Brown has refused to quit, going against the wishes of the City and the vast majority of the G20 nations.

May 21 (Bloomberg) -- Prime Minister Gordon Brown received a vote of no confidence from Standard & Poor’s, which lowered its outlook on Britain’s AAA credit rating for the first time.

The company today changed its view on the grade to “negative” from “stable,” chipping away at Brown’s once- unimpeachable reputation for managing the economy and making it more expensive for the Treasury to fund its record debt load.

The decision couldn’t have happened at a worse time for Brown, who is trailing in opinion polls and struggling to overcome a scandal regarding the spending of lawmakers. Yesterday, the International Monetary Fund said the U.K. needs to be more aggressive in curbing its debt.

“It is another body blow to Brown’s attempt to regain control of political stability,” said Bill Jones, professor of politics at Liverpool Hope University. “It is disastrous news for the British economy, and makes it even clearer that whoever wins the next election will have a poisoned chalice.”

The U.K. economy is suffering its worst recession since World War II, choking tax receipts, raising unemployment and producing the biggest budget deficits in six decades.

Brown, who served for a decade as chancellor of the exchequer under Tony Blair before succeeding him in 2007, has trailed the Conservative opposition since a five-month honeymoon with voters ended with his decision to abandon plans for an early election.

‘Utter Meltdown’

“Politically, Labour are in utter meltdown at the moment, lacking in all authority and credibility as a governing party,” Mark Wickham -Jones, professor of politics at Bristol University. “They are heading for a monumental and catastrophic rejection at the polls.”

One survey this month put the Conservative opposition 22 points ahead of Labour. Conservatives had the support of 42 percent of voters compared with 20 percent for Labour, according to a BPIX Ltd. survey completed on May 16. No margin of error was given.

The pound fell the most in almost a month against the dollar after S&P announced its decision, which coincided with figures showing the Treasury had an 8.5 billion-pound ($13.4 billion) deficit in April, the most for the month since records began in 1993. Stocks and bonds slid, and the cost of insuring debt against default rose.

Conservative View

“Britain’s economic reputation is on the line,” said George Osborne, the lawmaker in charge of Treasury affairs for the Conservatives. “Unless Britain has a government with a credible plan to reduce debt, there will be a further downgrade, with all of the serious consequences for our prosperity that would entail.”

The depth of Britain’s fiscal black hole, amounting to more than 12 percent of gross domestic product this year, means that whoever wins the next election will have to raise taxes, the Institute for Fiscal Studies said.

“Veterans of past Whitehall spending squeezes fear it will be very difficult to achieve even the spending plans in the budget, let alone more ambitious ones,” said Robert Chote, director of the research group. “If they are right, a government wishing to get debt down more quickly may need to rely more on tax increases.”

IMF’s Rebuke

Yesterday, the IMF said Brown needs to adopt a more ambitious program to repair the U.K. public finances urging him to put “public debt on a firmly downward path faster than envisaged in the 2009 budget.”

“This puts us in the same bracket as Spain, Portugal, Greece and Ireland,” said Danny Gabay, director of Fathom Financial Consulting in London. “There are some shades of the last Labour administration of the 1970s and some very striking political parallels between Brown and James Callaghan.”

Callaghan, who was defeated by Margaret Thatcher in 1979, also had to manage a budget position that like now was deteriorating “much more rapidly” than other countries, Gabay said. Brown, too, was unelected and failed to call an election when he stood a greater chance of winning it.

“There are some very painful parallels,” Gabay said.

For a decade as chancellor of the exchequer under Blair, Brown boasted about the nation’s longest economic boom in more than two centuries. Since he became premier, Brown has had to nationalize banks, clamp down on financial regulations that he loosened under Blair and extend more than 1 trillion pounds of support and loan guarantees to fend counter the slump.

Moody’s Support

Responding to S&P, the Treasury said its annual budget last month set out a plan to halve the deficit within five years. It also noted that Moody’s Investors Service reaffirmed its rating on U.K.’s sovereign debt, saying its outlook was “stable.”

Others noted that ratings companies have made less-than- perfect forecasts in recent years and that today’s announcement would mark the beginning of a battle between the government and those passing judgment on the deficit.

“It’s a straight race between the reputation of Gordon Brown and the reputation of Standard & Poor’s,” said William Keegan, author of the “Prudence of Gordon Brown,” a book released in 2003. “The ratings agencies have got quite a lot wrong lately, and have quite a lot to answer for.”

Tax revenue fell 9.5 percent and spending increased 5.4 percent in April, figures released today showed. Chancellor of the Exchequer Alistair Darling expects the budget deficit to reach 12.4 percent of gross domestic product in the year that began April 1 as higher unemployment ravages tax receipts.

Debt Burden

Debt may total 1.4 trillion pounds by 2014, and in his budget last month Darling announced a spending squeeze and higher taxes that will boost Treasury coffers by almost 27 billion pounds a year. Current spending growth will be limited to 0.7 percent more than inflation from 2011.

The IMF said yesterday that Brown must cut borrowing, limit the buildup of debt and keep a lid on spending as the economy emerges from its worst recession in more than six decades.

“We risk either higher taxes or salami slicing of key public services,” said Vince Cable, the lawmaker who speaks on economics for the Liberal Democrats. “Markets hate uncertainty and until the Government comes clean about how it intends to pay back its debt, it is perfectly possible that we will see a further deterioration in Britain’s rating.”

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net; Kitty Donaldson in London at kdonaldson1@bloomberg.net

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Very good post...gives an interesting and accurate appraisal of the current state of affairs in the UK.

Particularly intrigued by the possibility of the UK defaulting on its debts. Would we get to know about it? Would it really be conducted behind closed doors with the IMF?

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Hmm, three day old news. The reason for re-cycling?

I don't know about you, but this is the first time I've seen a link made between S&P's negative watch, market uncertainty, and Gordon Brown's refusal to call a general election (laurejon's post above).

Gordon Brown's refusal to call a general election is now having a serious impact on the UK's credibility in the Global Markets, interest rates are now predicted to go double digit when the overseas investors dump the UK Governments bond issues as they are seen as very high risk, with a very possible default as the UK goes into behind closed doors with the IMF.

Interesting article, btw, laurejon. Thanks for posting.

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Very good post...gives an interesting and accurate appraisal of the current state of affairs in the UK.

Particularly intrigued by the possibility of the UK defaulting on its debts. Would we get to know about it? Would it really be conducted behind closed doors with the IMF?

We will never default on our debts in the sense coupons will be paid.We are already defaulting on our debts with QE.The debts are being paid with de-valued currency and will continue to be so.

The deficit is so high (and rising) QE will be a disaster for people with all assets in sterling.Brown has locked the UK into massive spending due to his social engineering and huge growth of the public sector.No realistic tax take can ever hope to pay it.

For now people earning in sterling should be getting that money in foreign markets as quick as its earned.Savings should of been out of sterling since late last year.

The UK is starting to crack,massive spending cuts will happen at some point.Most people now know we are in trouble,they just dont know whats coming.

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We will never default on our debts in the sense coupons will be paid.We are already defaulting on our debts with QE.The debts are being paid with de-valued currency and will continue to be so.

The deficit is so high (and rising) QE will be a disaster for people with all assets in sterling.Brown has locked the UK into massive spending due to his social engineering and huge growth of the public sector.No realistic tax take can ever hope to pay it.

For now people earning in sterling should be getting that money in foreign markets as quick as its earned.Savings should of been out of sterling since late last year.

The UK is starting to crack,massive spending cuts will happen at some point.Most people now know we are in trouble,they just dont know whats coming.

Maybe you can tell that to those in the world that have been buying our debts ?

When the world no longer wishes to buy our debts, we face the serious possibility of a default. With Gordon Brown now considered to be the architect of our demise, and indeed many of the nations of Europe, as Chancellor Brown is well remembered for his speeches around the world advising of a light touch regulation in the financial system, and advising that public debt makes a nation wealthy.

Investors Should Avoid Long Gilts on Rating Risk, Kokusai Says

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By Wes Goodman

May 22 (Bloomberg) -- Investors should avoid buying long- dated gilts after Standard & Poor’s cut its outlook on the U.K.’s AAA credit rating because of the government’s deteriorating public finances, according to Kokusai Asset Management Co. Ltd.

Shorter-dated U.K. government notes are more appealing, said Masataka Horii, a senior portfolio manager in Tokyo at Kokusai, the largest holder of the debt among companies that make regulatory filings. Britain plans to sell a record 220 billion pounds ($350 billion) of gilts this fiscal year, 50 percent more than last year, to help drag the economy out of the recession.

Gilts dropped, pushing the yield on the 10-year bond to the highest level in two weeks, after S&P yesterday cut the outlook on the U.K. to “negative.” Britain faces a one in three chance of a ratings cut as its debt approaches 100 percent of gross domestic product, the ratings company said.

“I want to avoid longer-term bonds because we can expect rising government spending,” Horii said. “For securities within 10 years, the government will try to keep yields around this level.”

Kokusai also prefers short-dated notes because “the central bank will keep buying,” Horii said. The Bank of England was given government permission in March to buy as much as 150 billion pounds of assets to try to lower borrowing costs.

The $47.3 billion Kokusai Global Sovereign Open Fund, Asia’s largest bond fund, holds gilts with an average maturity of five years, versus 10 years for the benchmark index it uses to gauge performance, he said. Kokusai Asset holds 0.2 percent of the U.K. government’s 874 billion pounds of debt, according to data and regulatory filings compiled by Bloomberg.

Increased Holdings

Global Sovereign Open increased its holdings of U.K. bonds to 6.2 percent of assets, from 4 percent at the start of 2009, Horii said. The move brings the investment in line with the benchmark Citigroup World Government Bond Index, he said.

The yield on the 10-year gilt rose six basis points to 3.72 percent by 2 p.m. in London, bringing its gain this week to 19 basis points. Two-year note yields were little changed, leaving them three basis points lower from a week ago at 1.02 percent. Yields move inversely to bond prices.

U.K. government bonds handed investors a 3.1 percent loss this year, according to Merrill Lynch & Co.’s U.K. Gilts index. U.S. Treasuries fell 3.9 percent and German government bonds dropped 0.8 percent, the Merrill indexes show.

‘First to Recover’

The pound is “at a very cheap level” and U.K. Prime Minister Gordon Brown is working to snap the economic recession, Horii said.

“Even though the British economy is still bad, the currency has been devalued dramatically,” Horii said. “They’re expanding government spending, helping their banking industry and bringing liquidity to the market. It is possible the U.K. economy will be the first to recover.”

The pound was little changed today, leaving it 20 percent lower against the dollar and 10 percent weaker versus the euro in the past year.

The British economy, the second-largest in Europe, shrank 1.9 percent in the first quarter, the biggest contraction since 1979, a government report showed today.

Britain’s debt in April climbed to 754 billion pounds, or 53.2 percent of gross domestic product, according to the Office for National Statistics. Debt may surpass 2.2 trillion pounds when part-nationalized lenders Royal Bank of Scotland and Lloyds Banking Group Plc are taken onto the government books, it said.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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