Sunday, March 14, 2010

Europe's Second Largest Bank Warns on UK Debt Crisis

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Any stories like the one below are almost laughable in the current belief system of "everything is too big to fail, and anything on Earth can be bailed out so just buy stocks".  But just keeping it in front of you - one day this sort of fundamental issue will matter again.  I will keep pushing out the United Kingdon ahead of Japan as the potential "big one" that hits first, since Japan's debt is mostly financed by their own population (who has a high savings rate).  So in theory their situation could go on a very long time since they require very little from foreigners to keep the game going. On the other hand, the advantage the UK has is much of its debt has a quite long term on it (14 years on average) versus the U.S. which is roughly 5 years, before it needs to be rolled over.  But frankly it will all come down to confidence and measuring that with facts and figures is impossible - we saw that in 2008.

As always, in the Twilight Zone backstopped galaxy we live, it will only matter when it matters. Let's see if either the coming election, or if the UK central bank is forced to embark on a new round of QE to monetize the debt is an event that will "matter".

Via UK Telegraph:
  • UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece.   The Italian-German group, Europe's second largest bank, said Britain's tax structure will make it hard to raise fresh revenue quickly enough to restore confidence in UK public finances.
  • "I am becoming convinced that Great Britain is the next country that is going to be pummelled by investors," said Kornelius Purps, Unicredit 's fixed income director and a leading analyst in Germany.   Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance.
  • "Britain's AAA-rating is highly at risk. The budget deficit is huge at 13pc of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that," he told The Daily Telegraph.
  • "Sterling is going to fall further over coming months. I am not expecting a crash of the gilts market but we may see a further rise in spreads of 30 to 50 basis points."
  • "The UK may have difficulty in attracting extra investors to fill the gap. We think they will have to do more QE as recovery falters," he said.
  • BNP Paribas expects sterling to drop to $1.31 against the dollar this year and reach parity against the euro despite troubles in Club Med. "We're very bearish on the UK," he said.  ("Club Med" is what the Europeans call the southern and western countries who are currently flailing in debt - we call them PIGS
  • UniCredit said Greece is better placed than the UK in coming months even if deficits look comparable. "The polls point to a minority government in the UK, while Greece's government can count on a majority to push austerity measures through parliament. Secondly, the British tax system offers less leverage for a rise in revenue," he said.  Paradoxically, Greek tax evasion creates scope for a surge in revenues from tougher enforcement. "It is not out of the question that we will see a positive surprise in Greece: is there any such hope for Britain?" said Mr Purps.
The irony is in that last statement is quite rich; effectively it is saying by being law abiding tax paying citizens there is not much more to squeeze out of those British.  However, with so many in the Greek system happy to evade paying taxes, if the country simply enforces its tax rules there could be a huge swing up in revenue.


While what we read about above is dark, if you want to brush all your worries away (while buying stocks hand over fist of course)... the most important corporation in the planet says there is nothing to worry about:  At least for 14.1 years. :)
  • Big global banks are divided over Britain's economic prospects . Goldman Sachs is betting on a turbo-charged recovery as the delayed effects of sterling devaluation kick in.
  • Britain's trump card is an average debt maturity of 14.1 years, nearly three times US maturities and double those of France. This greatly reduces the risk of a "roll-over" crisis.

[Mar 1, 2010: Pound Sterling Takes a Hit as Labour Party Gains in Polls]
[Dec 1, 2009: Morgan Stanley Lists UK Sovereign Debt / Currency as Potential "Fat Tail" Risk for 2010]

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