UK Debt Downgrade "80% Certain"

Tomorrow's DT will make further horrible reading for Brown and Darling (I dearly hope). According to one of their economics journos, Ed Conway, the head of one of Britain's leading fund managers, Neil Woodford, Darling's and Brown's inability to face up to the unsustainable scale of their spending and consequently gigantic debt levels - at least in peacetime - is now virtually certain to lead to a credit rating downgrade and, far worse, a subsequent debt spiral. Woodford is quoted as saying:

I would argue that there is a high probability... a decent chance that we will be downgraded, and it is a near certainty if we do not, in the wake of the next election, properly deal with the deficit. There are some major challenges here. If we do not take the medicine, there will inevitably be a downgrade. If we do, we have a chance of escaping a downgrade.

After the PIMCO shock, where their experts determined that there was an 80% probability of a downgrade from AAA and acted accordingly by dumping UK gilts, it seems this gathering economic storm is going to make the current arctic weather and subsequent national chaos look like a soft, Barbados beach on a warm day.

And the only party with a plan for getting us out of it with a coherent fiscal policy, designed to allow monetary policy to remain loose by avoiding the downgrade and subsequent, devastating interest rate rises and inflation, thus enabling a strengthening in any recovery, is the Conservative party. Philip Hammond proved that yesterday.

No wonder the Tories want an election right away. They're not bluffing - it's vital that we have a change of government because it really is the 11th hour for Britain's finances and economy.

Action must be taken - now!

By the way, well done Gordon. Well done Darling. Britain really is nearly bankrupt, thanks to you. Marvellous.

Brown's Gilt Trip

Mark Bathgate warns that Brown faces a major headache next month. The cost of Britain's debt is creeping up, especially after PIMCO decided to dump UK gilts, making it more and more expensive to fund, as Bathgate calls it neatly, Brown's "fiscal debauchery". As Bathgate says:

With inflation continuing to "surprise" on the upside, how long can the Bank of England keep justifying printing money? Now we learn that the Bank of England had printed £193.5 billion to finance government spending by the end of last week. So we are only four weeks to the next MPC meeting – but there is only £6.5 billion of new money left for them to pump out before they hit their £200 billion limit. Then we enter the scary territory I outlined in an earlier post. And Brown is still left needing around £15 billion of Gilt sales a month to finance his fiscal debauchery.

The Gilt market was fine while Brown's appointee's to the MPC were willing to keep the printing presses rolling to the tune of £1 billion a day through the summer. But...as inflation has started to rise quickly, the pace of money-printing and Gilt purchases has had to slow.

This has become a race for Brown, between the general election and a visit from the IMF. How long can he keep hosing borrowed money away, with no cogent plan to bring spending under control, or, in fact, no apparent acceptance even of the need to do so? The truth is, he can't face up to reality, but reality is about to bite. However, his head is currently buried deep in the snow. In what appears to be yet another classic Brownian displacement activity, he's taken personal control of the nation's dwindling grit supplies. Well, Gordon, this country and your diabolical premiership are on life support. And it's about to be switched off.

Seems to me this is an argument for a March election, but I reckon Brown is running another kind of race in his fevered imagination. He thinks that if he hangs on long enough, then the recovery will have begun and he will be able to take credit for it.
It won't matter to him that we were first in and last out (by a mile).

What he doesn't seem to realise is that the rest of the world, especially the parts having to fund his economic lunacy and political dishonesty, couldn't care two hoots about his political destiny, or the financial stability of Britain, for that matter. Why should they? But they could well be about to pull the plug, and yet the Bank of England has no choice. With inflation rising, adding to the strain on an economy mired in debt and still, officially, in recession, it will not, as Mark Bathgate suggests, be willing to go beyond the £200Bn funny money level. Next month will therefore be crunch time for Brown. He's gambling with the British economy and people's livelihoods just to save his own political skin.

But even if he thinks he's got away with it, with the start of a limited recovery (after the longest, deepest recession in the world, remember), he will not be forgiven for his behaviour and for the disastrous state he has left Britain in. That's the misjudgment he, and many of his jellyfish Labourist co-conspirators, have consistently failed to comprehend.

Give us the election so that we can explain it to them.

Meanwhile, as Bathgate says:

The market has already started to push up the cost of borrowing for the UK. It's risen by 0.6 percent over recent weeks. Despite having official rates over half a percent lower, UK borrowing costs are now 0.7 percent higher than those of Germany. I suspect the Gilt market will be very vulnerable in coming weeks.

Hang on to your hats, folks, we're all on Brown's gilt trip and it's gonna be one hell of a bumpy ride.

E. Balls, A. Balls, PIMCO and Gilts

I was just skimming through the comments beneath Jeff Randall's latest all-out assault on Labour's epic economic incompetence when I stumbled upon something rather interesting of which, in my ignorance, I knew not (thanks to the poster "BD MATHERS," I do now). The European portfolio manager (chief buyer) of the biggest bonds and gilts dealer in the world, PIMCO, is none other than one Andrew Balls, Ed Ball's much smarter little brother.

"So what?" you may well ask. Well, for one thing, PIMCO holds $183Bn of assets and, as such, is the biggest company of its kind in the world. What is more, it's playing a vital role in keeping the British economy's head just about above water, for now - (or, at least, keeping the Labour shipwreck afloat). However, PIMCO announced yesterday that it will be withdrawing from both the US and the UK markets. The US will just about be able to cope with this since it has many other options open to it. Not so the UK, a far smaller economy where debt dependency means we are orders of magnitude more leveraged than the States. As the "economic voice" blog says:

In what amounts to a massive vote of no confidence PIMCO has announced that it will cut back on its UK and US government debt holdings. They see government borrowing rising and the central banks no longer buying through quantitative easing, which will push the supply / demand balance into negative territory for them. They are expected to move into European government bonds as these have not had the same level of government support. If a flood of UK Gilts are dumped on the market we could see yields rise (prices drop) more than anticipated.

This leaves the questions of where will the government raise the circa £180 billion it needs for the next year? And how much more of a premium in the form of increased bond coupons (interest) are we going to have to offer before investors are happy to take the risk of buying new Gilts? Also, when will the Bank of England be able to sell its accumulation of Gilts back into the markets without suffering a massive loss?

Next stop the IMF?

Indeed. This is a very, very serious development which has all-but been drowned out by all the noise coming from Brown's latest pathetic leadership crisis over the last 24 hours or so, although some bloggers, most economists and some broadcasters did pick it up. It is a stark truth, but Jeff Randall is absolutely right: Britain is broke; the coffers are [worse than] empty. He was wrong, however, in his assessment that both main parties are too scared to talk about managing this calamity. As I said earlier, Philip Hammond was refreshingly candid, forensic and solid in appraisal of the Labour-led crisis in the PBR debate today. It's only Labour that's delusional about the scale of the problem, in particular the Prime Mentalist himself - oh, and one Edward Balls.

Which brings me back to the theme of this post: the embarrassment the Balls brothers connection might (should) cause the government. Why? Guess who will be steering through PIMCO's dumping of UK gilts. One Andrew Balls, European portfolio manager. The "economic voice" again:

Apart from the economic repercussions for Britain, it also embarrassingly appears that Andrew Balls (younger brother of Ed Balls, Secretary of State for Children, Schools and Families) will be overseeing this withdrawal as head of PIMCO’s European investment team.

But in a huge, gobbledigook in-house interview posted after Christmas on the PIMCO Europe website, Balls Minor puts a bit of English on what the company calls its "European Cyclical Outlook and Strategy" (aka, its "Get the hell out of the UK as fast as possible" plan).

...there is more uncertainty around the forecasts than usual, and it is even more difficult to identify the turning point in the economic cycle because larger, secular changes are also underway. Over the long term, we expect to see a major shift to lower growth in the developed economies, higher growth in the emerging economies and greater government intervention and regulation overall. PIMCO calls this new economic reality the New Normal.

Compared with the core eurozone countries Germany and France, we see the UK as having a more difficult adjustment to make to the New Normal due to weaker initial conditions, greater ongoing need for deleveraging and, in the household sector, the need to rebuild savings, which are low compared with the savings rates you see in Germany or France.

However, the UK has benefited from more aggressive policy interventions and related to this, the depreciation of the British pound versus the euro and the dollar. We also consider the UK a more flexible economy than Germany or France. That is a benefit for the UK in terms of handling the big shocks we have seen hit these economies.

Taking all these factors into account, the growth forecast ranges are similar for the UK and the eurozone as a whole, and their outlooks are broadly similar, but the midpoint for the UK is a little bit higher than that for the eurozone.

Another important point is that while we see unexciting growth at the eurozone aggregate level, we expect to see considerable differentiation across member countries because of weaker initial conditions and greater deleveraging requirements in some countries.

Get that last bit? "Weaker initial conditions and greater deleveraging requirements in some countries [in Europe]." For 'some countries,' read the UK. For 'weaker initial conditions,' read Gordon Brown's total cluelessness in his decade of lunatic spending into a massive property bubble that he helped to create and fuel. Seems spinning the facts could therefore be in the Balls family genes. To be fair to A. Balls, though, he is stuck between a very thick rock (filial loyalty to an older brother - and sister-in-law - who helped cause the UK's current economic chaos) and a very hard place (doing his job). It seems he plumps for the latter in the end, though, in his assessment, stating (in econo-nerd speak, naturally) that:

In the UK there is also uncertainty over what the Bank of England (BoE) will choose to do with the stock of gilts it has bought during 2010. The BoE has bought gilts across the curve, whereas the Federal Reserve’s quantitative easing purchases have largely been focused on mortgage-backed securities. So there is a bigger question mark over the exit strategy here for the BoE, whether it will continue to hold these bonds or whether it will at some point try to reduce those holdings.

Because the eurozone does not have large-scale quantitative easing programmes to unwind, we remain moderately bullish on eurozone duration. We also remain positive on covered bonds in the eurozone. The impact of ECB purchases of covered bonds is very minor compared with the quantitative easing programmes in the UK and the US...

This is why his bosses have told him to dump the UK (and US) and buy European debt instead. He goes on (boy, he goes on!)...

On the UK side, in addition to the risk associated with the end of quantitative easing, there is also political uncertainty surrounding the elections, most likely happening in May, and the implications there for fiscal retrenchment and for fixed income markets. The chance of renewed pressure on the British pound remains a source of tail risk, a risk that poses a market crisis or systemic event that can severely hurt portfolio returns, in the UK.

In other words, the UK is the most likely candidate for basket case status in the entire continent of Europe. I wonder if Ed knows what his brother's been up to? Andy knows what Ed's been up to, that's for certain. You know what, I think Britain ended up with the wrong Balls in the government.

Anyway, that's enough of that. It's all just too unspeakably depressing for words. My God this country has been fubar-ed by Labour. Again.

Bank of England Doesn't Deserve Its Independence

As a new report from the Bank of England is released, predicting a slow and painful return to growth for Britain starting in January 2010, and, bizarrely, enduring low inflation, one is left wondering if any of them can have any credibility left at all. I say this cautiously; the real villain of this piece is, always was and ever shall remain Gordon Brown whose mixed signals (orders?) to the Bank for so many years have been leading it up the garden path ever since it was given its so-called independence. This was Brown's bust, following inexorably on from Brown's mega housing boom. But he could not have done it without a fairly tame governor and Monetary Policy Committee so they are not exactly blameless themselves.

However, bad though that is, it's not really the thing which annoys the most. No, what really gets to me is the total, ongoing arrogance of this bunch of overblown economists (soothsayers and pseudo-scientific charlatans, in other words) whose every prediction thus far about the state and direction of the economic condition of Britain since Brown's uber-bust began (which they did not see coming incidentally, an epic failure surely on a par with the CIA failure to spot the fall of the Soviet Union and the end of Cold War: exactly what they were there for!) have been wrong - and not just wrong, mind you, but massively, wildly wrong.

The question is, therefore, when Mervyn King says that growth is around the corner and inflation is "dovish", why on earth should anyone believe him? Sure, if you look at the graphs, what you see is a very long, drawn out version of the Darling "trampoline" V-shaped recovery (the trampoline's springs were a bit loose, eh Darling?). In fact, for most of 2010 and early 2011 all you really have is stagnation. If you look at the lower tolerances of said graphs (which betray the scale of the B of E's hedging), I suspect you are looking at something that more closely resembles what will emerge as reality: zero or weak growth for up to three years with the distinct possibility of a double dip recession by 2011/12. Factor in the inevitability of currency devaluation thanks to the deficit, the debt crisis and subsequent inflationary pressures, and yes, you have the old Labour disease back with a vengeance: stagflation. It's the word economists dare not utter. It is That Which Must Not Be Named - the Lord Voldemort of economics, whispered only by the brave or the foolish: "stagflation". Well, I must be Harry Potter, then, because I'll bloody well shout it from the rooftops: S T A G F L A T I O N!!

Point is, I wonder why this or, at least, something like this, isn't really being talked about, especially in the mainstream media. It is almost certainly the most likely outcome of the current, parlous economic state Britain finds itself in, with huge amounts of slack in the economy, no credit and virtually no demand, but with ever-active unions and wage inflation, a fragile currency and a world that's losing faith in Britain's ability to pay for its debts. So the question must be, just how much political pressure is being put on King and the MPC by Brown and Darling and Balls and Mandelson (what a bunch that is)? I would have to say a hell of a lot and it has helped to destroy their reputation.

Answer? Well, in the short term at least Osborne should bring the Bank back under his control, at least until a genuine, less tarnished, contaminated kind of independence can be designed. At the moment, the Bank simply doesn't deserve its independence, even if it is now independent only in name. A shake-up is definitely required, and a complete change in policy direction, if we are to have any hope of avoiding that which must not be named - urgently. So why not start with the Bank of England?