Overrated?

The fundamental problem remains: to restore the 'true' productive rate of profit requires a huge devaluation of capital.

Consumers and governments are saturated in debt.

The recent government stimulus has merely postponed not solved the problem.

Capital devaluation/debasement of currencies remains a very likely outcome.

Very interesting blog. Makes the ratings agencies all look a little bit like a waste of time really though, doesn't it?! This harks back to the Iceland fiasco which really showed them all up.

What on earth is the point in relying on ratings agencies where they suffer from political pressures (resulting in biased decisions), have clear conflict[s] of interest, don't reflect market sentiment and are grossly out of touch with reality?!

I suppose we shouldn't shout too loudly as at the moment this is all to our benefit, if anything, though from what you say even that is a little unclear- the market has already moved on as well it might. Trouble is this temporal element...right now the BofE are buying but QE is/has come to an end, what then?

No mention of interest rates at present? They're historically low and inflation is on the rise. How do you solve a problem like stagflation?

The preferential rates offered by the BoE to preferred and privileged buyers cannot be maintained and British gilts now have the taste of a mouldy cheese sarni' in terms of international finance, irrespective of how much QE money can be thrown at it.

Would you rack up your transaction costs buying British gilts with the uncertainty of whether you hopefully to be paid later but with the uncertainty of being paid in GBP's or Euro's?

Non. dom international investors and bankers might as well buy gilts elsewhere in the world, due to the uncertainty of UK currency and finances.

The UK has slid into the Greece! But no one wants to admit it yet!

Down grading UK's rating therefore will not have much effect in terms of servicing the public debt? Do not underestimate the political fall out just before an election and possible loss of confidence - run on £ defensive rise in interest rates, recession part two - Tories unlucky to win election.

Don't see what all the fuss is about - any time we're skint, the Bank of England just prints a few more billion. Good old Mervyn King has it all in hand, no problem. Caledonian Comment

Nice post Stephanie, playing both sides rhetorically is about the best a journalist can do without becomming a columnist.

I like many others here were predicting a bit of a bloodbath when we got downgraded, but of course we were starting from the floored premise that rating agancies have any relevence anymore Post 2008.

The markets are already reflecting the stark reality but how is that reflected in the Chancellors figures? Does he assume AAA rated status or do they base thier figures on current real market trends in terms of the costs of servicing the debt?

I am with #2 on this, where does this leave the rating agencies and all their highly paid staff?

How can we be in the position that we still pay attension to the ratings of agencies that have no credibility themselves.


Just another example of the leveraged global political / finacial / media elite self interested money-go-round unofficial 'gentlemans club' which governs via the informal cocktail parties held on yaghts in the med during the summer.

Maybe you should go under-cover Steph....

Isn't this that despite the fact that we haven't formally and publically lost the AAA rating the buyers of UK debt have effectively already factored that we will lose it into their costings and hence the increased margins.

We do indeed live in "interesting times".

A very interesting article and highlights the cost of the lack of real action by Flash/Darling in reducing national debt in the PBR (and before). If we are now paying an additional 30-40 basis points (let's call it 35) over the real AAA countries.....on £850,000,000,000 of national debt, I make that an EXTRA £2,975,000,000 per annum interest on gilts.
Forget just cutting the budget deficit, we need to be reducing the massive debt as well before we lose our ability to do so.

Two obvious questions come to mind.

Firstly, given the very definition of what the AAA rating means, how can any rating agency give Western economies that are saddled with vast debts anything like AAA and keep a straight face?

Secondly, it would be interesting to see the credit spreads on UK debt as compared to other debt. This acted as a good early warning system of both Ford and GM going into Chapter 11 - when the credit spreads spiked anyone watching knew it was a fair bet that major trouble wouldn't be far away. Last I heard our spreads were larger than McDonalds, which gives the surreal picture of the markets trusting Ronald McDonald more than they trust a certain Messrs Brown and Darling.

Of course another major issue we're going to face with Brown and Darling at the helm is confidence in the future. At the very least domestic investors are going to want to know how any future income is going to be taxed. When both Brown and Darling have introduced rushed changes to tax legislation and sometimes introduced it retrospectively, we cannot have any confidence that they won't change the rules again during the life of the gilt.

So on that basis alone I'd be wary of investing, and that's before taking into account the nominal interest rate against probable future rates, likely future inflation etc.

So the country has a credit rating. I wonder if THEIR credit rating is as accurate as the British individuals is when they apply for a credit card or mortgage?
Ah well....it could be worse, the U.K. could be in the same position as Iceland, Ireland and Greece. Then again, perhaps the U.K. is.
Perhaps it's time for the Bank of England to fire up it's printing press and start producing more notes. Perhaps the Treasury could run off to the IMF for a loan. How about devaluation?
Doesn't this all seem reminiscent of the 1970's?

The fundamental problem realised by most of the posters is simply our debt (government and consumer) is too high, even if our sovereign gilts were priced the same as US and France. So to find out the AAA rating is a piece of fiction is not really particularly relevant UNLESS the cost of borrowing goes up again when we are 'officially' downgraded by the rating agencies (which do seem a bit pointless).

AA or AAA, matters little, The fact is the UK is bust. I watched the news last night with incredulity - one of the main stories was about how Greece is effectively bankrupt, yet our borrowings are higher! Wake up, smell the coffee (if you can still afford a cup!), urgent action is needed NOW to balance the books - the burden of repaying this debt will cripple the UK's competitiveness for decades

A previous blogger made the point that the credit agencies have little credibility left. Their ballooning balance sheets may indicate that they are not as impartial as they seem.

The bond markets are not concerned with balance sheets.

Re: #2 and the rating agencies..

'Harking back to the Icelandic fiasco' is just the latest example of the Rating Agencies incompetence or collusion depending on your point of view. Moody's, S & P, and Fitches have no compunction about downgrading the credit ratings of small nations and mid-size businesses but when it comes to giant multi-nationals or the biggest 30 or so nations in the world they are mysteriously slow off the mark.

Well, maybe its not so mysterious as their fees are charged proportionate to the amount of debt they are asked to rate. Thus when Enron was the biggest company in the world their bonds were still triple A rated three days before they went bankrupt. It was a similar story with Worldcom and every other huge bankruptcy in the last twenty years, the idea that the rating agencies 'didn't see it coming' is laughable, what they actually try to do is squeeze as many fees out of governments and businesses right up to the very last minute, until downgrading is absolutely unavoidable.

Oh, and let us not forget that the CDO Swaps on Sub Prime mortgages in the US were ALL given AAA investment quality status, essentially guaranteeing that they woud end up in pension funds around the world...

With their utterly useless track record in analysing the true worth of any major institutions debt or the value of financial instruments I really don't know why their ratings are taken seriously at all.

Dear Stephanie, your summaries of events make those of your colleague Robert Peston look amateur. No emotion, no personalisation just good honest and pure reporting, absolutely brilliant.

So the Bank keeps the QE up until the velocity of circulation recovers, then starts to offload the gilts onto the market which it has already buttered up by insisting on higher gilt requirements for the pension funds and banks. seems pretty straightforward to me.

To my fellow bloggers:

This comment has been made several times now going back to 19th November:

As regards the UK’s AAA rating:
The first is A is given because you pay back the capital.
The second A is given because you honour the interest payments
The third A is given because you don’t water down the value of the gilt by printing more money.

The third ‘A’ is long gone, but not admitted to.


Now given the various points that have been made, by the various bloggers out there, I’m beginning to wonder whether the journalists are behind curve.

In fact having spoken to an investment manager as well, I’m starting to wonder whether the journalists are alone.

However I take my hat off to Mervyn King. He’s managed to by-pass the Maastricht treaty to keep government funded, hide a £62 billion loan, and fool a skip load of journalists in the process.

I wonder what he’s got planned next?

#11 Eurosider. No. Nothing like the 1970´s at all. This is full spectrum meltdown, and a tsunami of catastrophe is headed your way. Defend yourself as best you can.

https://www.zerohedge.com/article/shadowstats-john-williams-prepare-hyperinflationary-great-depression

Hi Stephanie

Thanks for your comments on this issue. I have been following the developments in sovereign debt markets in various places such as notayesmanseconomics.wordpress.com and there is a lot to worry about! After all look at today's inflation numbers.

Francesca

Stephanie,

Important points indeed you make. The same Robert Stheeman answered an important question to Mr Tyrie of the Treasury Committee on 21 October in relation to the BoE unwinding its QE purchases, having been a dominant gilt-buyer :-

"Q23 Mr Tyrie: You have described this extremely benign environment in which the Government is taking the lion's share of what you are trying to get out into the market. Not only is that going to stop, it is going to go into reverse, is it not? The Government is going to have to shift this stuff? So the pressure in the gilt market is going to become very severe indeed at some future date. Yields are going to rise, are they not, quite a lot?

Mr Stheeman: I fully accept that and I would be the first to acknowledge that I would accept that whenever the Bank decides both to stop QE and potentially even to reverse it, we will find ourselves in a very different environment. But it goes back to my point, and I completely agree with you, I think yields will rise. I do not know by how much, but they will rise. But at the same time, in fairness, that is ultimately where the market and this efficient market mechanism that I was referring to kicks in. If the market does its job well and efficiently, then the price of the gilt that we are selling should be able to adjust itself relatively smoothly, but that is absolutely key. We are under no illusions about the challenge ahead!"

To what extent, Stephanie, is the yield shift an anticipation by the market of QE stopping / then unwinding as opposed to a negative sentiment on the credibility of the PBR / structural deficit danger / credit ratings issue?

Also, what could happen to the exchnage rate if gilt yields rise?

As previously posted, I take my hat off to Mervyn King. He’s managed to by-pass the Maastricht treaty to keep government funded through the back door, hide a £62 billion loan, and fool a skip load of journalists in the process.

And he also had me fooled for a while as well.

So what’s he got planned next?

Now he doesn’t come across as being a complete government stooge.
And he’s certainly a wily old goat, I wouldn’t want to play poker against him that’s a fact. So what’s he going to do next?

Well he’s used his position at the BOE to keep the government funded, which despite the blatant stupidity of our elected politicians was probably in all our best interests.

So come on Mr King, the DMO are going to struggle shifting £200 billion of gilts next year, where do you stand. You’ve already sacrificed your reputation as a central banker once, will you do it again?

Oh and while I'm on, a word of advice from an average working Joe; remove that statement on the BOE website, namely:

The Bank's Financial Stability Role
A stable financial system is a key ingredient for a healthy and successful economy. People need to have confidence that the system is safe and stable, and that it functions properly. The Bank's role is to contribute to maintaining the stability of the UK financial system.

It leaves you hopelessly wide open to unfair ridicule.

Government bonds have easily outperformed equities over the past 10 years.

Since the year 2000, the FTSE100 has fallen by 23% in nominal terms.
By comparison, the yield/coupon rate of 10 year gilts back in year 2000 was close to 6%.

Of course, the past is no guide to future performance....

For #9 5y Credit Default Swap spreads for the UK and our "peers"

UK 77.5-82
AUSTRIA 82-86
BELGIUM 46-50
DENMARK 31-34
FINLAND 24-26
FRANCE 25-27
GERMANY 22.5-24.5
GREECE 240-247
IRELAND 152-158
ITALY 93-97
NETHER 30-34
PORTUGAL 75-78
SPAIN 92-96
SWEDEN 52-55
USA 31-36

Right up there with Austria, Portugal, Italy & Spain!

Cadbury 5Y CDS trades ay 76...the people who make chocolate money are less risky than the UK Govt who prints "actual" money

What should we expect?

Our government delays reduction of their huge debt reduction after the next election.

Our government prefers to buy American helicopters, presumably to support more military adventures like Iraq and Afghanistan, rather than spend in the UK to maintain Harrier and Tornado squadrons to defend our own soil.

BA air crew prefer to throw away their own jobs and their own company rather than accept a clear economic reality.

Traders expect gigantic bonuses when times are good and public subsidy when they are not.

No one cares that we hardly produce anything that anyone wants.

Who would buy paper from such a bunch of cuckoos?

2. pawns_or_players:

"..... Makes the ratings agencies all look a little bit like a waste of time really though, doesn't it?! "

Yes. The way I think of it is that the ratings agencies' huge failures over subprime and derivatives hugely impaired their own credibility. Not surprisingly, therefore, investors tend to pay much less attention to the agencies' ratings than they did in the past, and prefer back their own judgements instead.

Therefore, putting a risk premium on UK sovereign debt looks an appropriate, market-related response to (a) the severity of the UK deficit, and (b) the lack of a coherent plan for deficit reduction.

As I see it, there have been two supportive factors underpinning UK debt issuance, and both are running out of road. First, QE has meant that the actual new sums needing to be raised have been small, but QE cannot go on indefinitely. Second, markets have known that resolute action is unlikely ahead of an election, so they've been prepared to give the UK some tolerance.

As both factors drop out of the equation, debt raising becomes tougher. This might be one reason why we may have a March election - it removes the risks associated with the production of an unrealistic, politically-inspired budget.

Whenever the election is, we'll have a budget immediately after it. This offers two possible outcomes. First, we have a resolute budget - spending is cut and taxes are increased, telling the public (AFTER the election, of course) quite how bad the pain is going to be.

Second, we have an irresolute, pain-avoiding budget - if that happens, the cost of debt issuance will rise very sharply, and escalating debt service costs will exacerbate the deficit. An irresolute outcome of this sort could begin to trigger a debt vortex.

In this context, 'interesting times' might be a considerable understatement of the outcome...........

I was particularly taken by the comment of # 11 Eurosider. Looked at from abroad the UK seems to be in a more parlous state than Ireland, if only because that government seems to be prepared to do something about the problem, whereas the UK government is looking more and more like a bunny in the headlights. I am hopeful that sterling will survive but am not putting any money on it, which is, I think, the message carried by the lead article.

Post 23. Also interest rates on UK government debt are only likely to go one way and that is up.

This is a bit naive.

If the UK loses her triple A rating it will mean that numerous holders, such as pension funds, etc will not be able to hold UK government debt any longer and will be forced to sell. This will lower the price, hence the yield will increase.

Furthermore, with less able buyers the interest rates will have to go up further.

#24, thanks for posting. Can you suggest a good reliable source of swap spreads, both for major countries and major companies?

I heard that McDonalds has a lower swap spread than the UK, but since I stepped away from the credit markets during 2006 (when I saw it was going south big-time) I don't have the live feeds I once had.

#15

Also add Lehmen Brothers that was AAA also until some hours or days before it colapsed they changed it to D.

Their rating is as good as the analysts expectations, show me one figure that an analyst got correct in the last couple of years. What I don't understand is why journalists still interview and quote analysts. They could as well interview hot chestnut sellers and get as "accurate" predictions.

Until our politicians and journalists wake up to the fact that markets & analysts & bankers are not gods to be worshiped but people that should be made to serve us the public we are doomed to suffer their ridiculous advices.

So the UK is skint and the charges and interest are racking up. Times have been hard and incomes have dropped while pressure has mounted from dependents for the latest goods.

The credit rating hasn’t officially dropped yet but it’s getting harder and harder to get cheap credit. The problem is getting through to the next payday, otherwise known as the next boom. If only we can get through to payday, we can pay back what we’ve borrowed.

The problem is its looking less and less likely that as a nation we’ll make it safely to payday.

I’m familiar with this scenario from personal experience, and lots more of you will be too. We never had the opportunity to expand our debt to the bubble level that the government has, although in my case it eclipsed my annual salary. The trouble is not necessarily the level of debt: it’s the long-term sustainability, except where short-term pressure causes a problem e.g. Dubai World.

Printing money will work to an extent, although the QE programme seems to be bloating the stock market instead of the real economy. Increasing the money supply is just blatant theft from other holders of UK sterling: the more this goes on the more the UK will pay to service its debt and the bubbles will eventually burst. When that happens we’ll all be worth a lot less than we thought.

Will the politicians ever make a radical decision and tackle this problem or will it only ever be something that it dealt with when it reaches total crisis? My guess is the latter, as the 4-5 year Parliamentary term just encourages postponement of the collapse rather than the structural rebuilding required.

What will the next stop-gap solution be? Joining the Euro?

#9 AAaaaaardvark and #24 SD

I'm not surprised re our position in the Credit Default Swap rankings. But I am slightly mystified re USA?

What is going on there?

The US has a budget deficit of c. 10% GDP, at c$1.42trillion. It may well top $1.5trillion by calendar year end. Records are being smashed all over the place (October-13th month in a row to show a defecit, it was in itself the fifth largest deficit ever).

So this all begs the question...why are US gilts still trading at 'AAA' levels?

These same "rating agencies" gave the bankks AAA only a couple of years ago and the auditors who gave the RBS a clean bill of health ?
Club for the boys has a wider membership than we know !

Good news today though from the EU ? The UK Banana Republic can stock up on tarrif free stock
A total shambles

Bond yields on sterling have been higher than an average for EU bonds for much of this year. That's because the British inflation rate now, and in prospect, remains a little higher than in Euroland. That higher rate needs some compensation in a greater yield. And you're correct, the withdrawal of QE buying probably had something to do with the small upward shift this week.
Just as I don't believe US Government Bonds now have higher yields than Germany's (instead of lower), because the ratings agencies are about to downgrade the US, it is unlikely that UK bonds are due for a reduction in their AAA rating either. Maybe something else is changing?
Inflation risk is back! Watch out now for growing yield differentials that reflect that risk.
By the way, falling Bond prices also mean the value of the BoE's Bond Assets have fallen too. Who'll be liable for that lost value, Mervyn, Alistair or, ... George?

Oh yes and another piece of advice from an average working Joe,

Dear Mr King, I’d ditch the monetary policy statement from your website before next Easter as well:

Bank of England monetary policy statement:
A principal objective of any central bank is to safeguard the value of the currency in terms of what it will purchase. Rising prices – inflation – reduces the value of money. Monetary policy is directed to achieving this objective and providing a framework for non-inflationary economic growth.

33. At 3:27pm on 15 Dec 2009, Wardy29 wrote:
'What will the next stop-gap solution be? Joining the Euro?'

No, you can't print your own money in the Euro, and the government's short at the moment.

Deep pockets...negligence...causing financial loss. A hint of any one of these is usually enough to trigger a lawsuit in the US. The ratings agencies seem to have all three. Where are the headline grabbing class actions ?

It has long since amazed me that so many intelligent people – including Stephanie – can continuously pass such informative comment regarding the failings of the current Government and yet, nobody seems capable of joining up the dots.

To do so will reveal the reality that the complete mess in which the UK finds itself is no coincidence – nor is it simply the fruits of an entirely incompetent Government(though the vast majority are). It is a pre-contrived initiative employed to usher in Communism by the back door!

The underlying objective of such a Government is to (initially at least) create a deep dependency on the State by its citizens.

Some of the other principle initiatives are; attacks on religion, freedom of speech, morality and, most of all, the family – the basis of society.

In brief, what we are being faced with in Britain today is Stalinism by the back door. What he failed to achieve by force is now being foisted upon us by a neo-Communist regime which hides under the banner of the Labour Party, or ‘New Labour’ as it is referred to today.

The extraordinary level of ‘spin’ and deception which are being hurdled at the general public today is designed to manipulate people’s minds so that they will eventually succumb to any stream of thought which is suggested to them.

The average citizen’s obsession with ‘fottie’, alcohol and the ‘X Factor’ are indicative of loss of social standing of our citizens and the carnage is there for all to see in the form of one of offering the poorest standards of education in the Western world, spiralling crime rates, expanding ghettoes/no-go areas and single parent families.

Divorce rates and a worrying imbalance in the age distribution of the population are further evidence of the state of decay within our society today, but there can be no hope of 'healing' until such time as the perpetrators of this diabolical conspiracy are exposed and sent packing.

Until such an exposure come about, our financial analysts will continue to define the ongoing nature of our downward spiral, while 'Comrades' in Parliament will attempt to divert our gaze with muzings of Global Warming and taxing Banker’s bonuses etc.

How stupid they must think we are - and they're probably right!

Declan Finan

@ Aaaaardvark: very difficult unless you want to pay a fee... you could try CMA Datavision or Lombard Risk

FYI McDonalds' spread is 39

@ leftie #36: whilst you're correct in part re. inflation expectations & expected future interest rates BUT you just look at the CDS levels for the real picture as they're independent of interest rates...purely credit risk.

*13 Greece £252 billion v UK 172ish They are really upto their necks in it.

Post 34. US treasury bonds are still the government debt of choice because of the huge and liquid market in them.

Also the biggest buyers of them generally China and other South East Asian countries are so committed to the US dollar they equally cannot afford to let the US treasury bond market crash.

40. At 4:08pm on 15 Dec 2009, Declan Finan wrote:
'How stupid they must think we are - and they're probably right!'

Well they probably are, but the more pople like you who post like that, the less likley it is that they will get away with it so easily.

UK, Euro & US Sovereign bond yields are up today. Does that mean we're all going to hell in a handcart?

Stephanie

Go back and ask someone in government what interest rates have been used in their 5 year "tractor" plan. Stephen Timms ploughs all round the field and still refuses to answer the question.

The problem is that the PBR was a work of fiction.

The UK's poor position is directly due to having too many international banks to support. This gave us such 'assets' as RBS (HBOS & NR were mainly insane multiples of income lending to the domestic property market.)

Basically the country's tax base is too small to support all of these banks. The consequence of this is that we are still/maybe in recession and combine this with the idiocy of the MPC /Mervyn King in keeping interest rates far too low for far too long and it is blindingly obvious that sterling will come under pressure at some point as will the necessary yield we have to pay for external debt.

Far from being in the best position to weather the economic storm - we are, relative to the size of our internal storm, very badly placed indeed. Even through we were probably better placed than others at the start - the problem is that we have an absurdly unaffordable international banking system to support on a small tax base. - just like Iceland etc.

My recipe is to take the pain and raise interest rates in January by one percentage point and then also in February, March, April and May - this may prevent a run on sterling and keep the price we have to pay for external debt within manageable proportions. Anything less will cause a damaging collapse. (Oh and fire Mervyn King, and the MPC as they got us into the hopeless situation.)

I don't think everyone is carrying a lot of personal debt I know that I'm not. But this isn't just about me. I've been dead against borrowing anything even when half starved but the response to all this has to be that they aren't going to think that future generations are going to be happy about working to pay off earlier generations debts. If you set the bar so high that nobody ever tops it then nobody ever will. So we're just going to be slaves forever. fighting bitterly for our human rights, or something.

sorry for sanctimonious username - I need to change it but just wanted to correct a few inaccuracies about ratings e.g. Lehman Bros Holdings Inc was never rated higher than A1/A+ (2005 to 2008) - but was admittedly still rated A2/A in Sep 2008 by Moody's & S&P. Similarly Worldcom and Enron were never rated higher than BBB equivalent by any of the main 2 agencies at any point. The agencies are not totally useless, just fairly useless.

I'm not an expert on financial matters but one thing that seems to be largely ignored by our media is that; as I understand it our total per capita debt is lower than that of Germany and minescule compared with that of Japan. It is also my understanding that whilst Germany are just beginning positive growth; their economy has shrunk more than ours. I hear lots of people dismissing these "facts" but no one seems to say they are untrue.

Clearly the situation here is serious but why are we being given what appear to be distorted comparisons with other countries? I suspect that the whole situation is being distorted because everyone is fed up with the government. If that is so I suspect that these "facts" will be more widely reported when we have a change of government?

Re Greece at £252 billion debt, worryingly they had the Olympics and then it all went pear shaped-oops!

As for Credit rating agencies, they should be treated like bankers with scorn as they failed dismally to see what was happening, or , did they know what was happening and turned a blind eye to it?

Were they Madoffing us all? Actually that could be a group name for Economists a "Madoff of Economists"!

My Work is done!

*49 Great Post.

"The agencies are not totally useless, just fairly useless".

Is that like being "a bit on fire"

"But here's what you say if you're the Conservatives - or for some reason you just want to be depressed"


Couldn't agree with you more Stephanie......you have got the Tories down to a tee......
THEY NEED TO MAKE THINGS LOOK GRIMMER AND GRIMMER TO GET ELECTED ,WITHOUT A CARE AS TO THE IMPACT THEY ARE HAVING ON THE IMAGE OF UK OVERSEAS....
but if you think they are depressing now, just how depressing it will be for everyone if these Tory doomsters get into power.
Osbourne has talked our country down and should be lynched!

It seems likely that, when growth unsurprisingly fails to materialise next year, that the capacity of the UK government to raise debt will become constrained by the ratings agencies and consequently more expensive. The AAA rating creaks on but, as the article admits, its loss has been tacitly priced in already by the markets.

Gordon Brown, in his roles as sulky manipulative Chancellor and more recently as unelected Great Helmsman has done a truly spectacular job in bankrupting Britain. It has been so successful that it's difficult to believe that it hasn't been done on purpose. The sequence of events...the waste, the hubris achieve almost stunning levels. The fact that his Government can wheedle and spin about the "global financial crisis" goes nowhere near to hiding the fact that our current problems are probably the very last thing to ever bear the stamp "Made in Britain!"

Finally, when the chance offered itself to steady the ship it was, in one final act of shameless political opportunism, thrown away to be replaced with saccharin assurances that everything will be alright and the tough choices could be put off until 2013. The world doesn't seem to be any different among our supposed elites...bankers continue to believe that they deserve rewards hundreds of times those of average people...the Labour Party continues to spend on its pet projects like there is no tomorrow, totally ignoring that fact their behaviour may very well result in the actually being no tomorrow.

At present, the only plan seems to be to remain in office, though not power as such, until the bitter end. It can hardly now be in the belief that an election is even winnable. It seems to be purely an attempt to foul the nest so comprehensively that the next administration is totally hamstrung. Surely the ultimate in cynically misreading the situation? Is there anyone out there worse than those greedy bankers? Well...yes because they are typically focussed on coining it over the next three months. New Labour however is now systematically putting in place the last few bricks that will hobble this country for decades to come!

If you're the government - or generally, none too bright - you could have the following positive line to take on all this. At least the interest rate on our mountain of debt is no more expensive to us than the Kergis or the Argentinians.
On the other hand, in simple and reasonable terms a haulage company becomes less competitive if it retains bad drivers and incurs ever rising insurance premiums. The solution for the haulage company and the UK are similar, better drivers and political leaders respectively.

RE: 50. AngloCelt

"as I understand it our total per capita debt is lower than that of Germany and minescule compared with that of Japan. It is also my understanding that whilst Germany are just beginning positive growth; their economy has shrunk more than ours. I hear lots of people dismissing these "facts" but no one seems to say they are untrue."

German government debt is around 90% of (German) GDP, but has been like that for a while and hasn't grown much during the recession. I believe Japanese government debt is around 170% and has been rising steadily for a long time - the recent recession hasn't changed the trend much. By contrast, last October UK government debt was around 60% of GDP - below Germany's and about a third of Japan's (so certainly not "miniscule"). Unfortunately, UK debt is rising at over 13% of GDP per year and will do much the same next year. Brown recently claimed he would cut the deficit (note carefully, deficit not total debt - that will never fall) to half the present level in four years. That would give us an annual borrowing requirement of 6-7% of GDP in 2013. At which point we will have a total debt of, roughly, 100% of GDP (ie above Germany's) and still growing strongly.

This is the real problem. Our debt is growing very rapidly and there are no credible plans to limit that growth and no plans at all to ever repay the debt.

"Clearly the situation here is serious but why are we being given what appear to be distorted comparisons with other countries? I suspect that the whole situation is being distorted because everyone is fed up with the government. If that is so I suspect that these "facts" will be more widely reported when we have a change of government?"

The comparisons are indeed distorted, but mainly by people who try to use Germany and Japan to pretend that the UK's debt and deficit (they are different) are somehow not that serious. The comparison doesn't hold. Both Germany and Japan are nations of savers and exporters. The UK is a nation of debtors and importers. Not only is our total debt growing far faster than, say, Germany's, our ability to cope with that debt is far less also.

53 onward-ho
Cast your mind back to before 1997. Nobody was more negative than the Labour opposition. The called all the moves wrong in opposition, the managed to do the same when they came into power.

One reason for the present financial crisis is the inability of financiers and the government to learn either from past or recent history. Last year showed that essentially the whole "rating" system was at best unreliable and at worst suffered conflicts of interest with fund managers both paying for ratings to be carried out and then benefiting from higher-than-appropriate ratings. The system, as far as I'm concerned, was totally discredited and can safely be ignored until it undergoes fundamental reform.

I'm puzzled then why you even bother to quote the UK AAA rating as it is so obviously inappropriate under present circumstances with the money printing going on at the BoE watering the currency down. Why then does it stand? Well, I suspect that if it were downgraded a lot of funds would drop in value and those hidden vested interests that fund the ratings companies would loose money.

Ignore the ratings. Do your own research. This appears to be what the market is indeed doing.

its not complicated its simple. The UK is going to have to pay more interest on its debt because;
1. It has a floating currency and is floating south against the dollar and the Euro
2. The government is up to it neck in debt, therefore there is a fair chance that revenues will be insufficient to cover our interest.
Gordon hoped it could keep the plates spinning until the general election in June ,but its likely the whole charade will collapse before this date.
The only logical solution is to balance the books ASAP , I have said it before but we need to be aiming for a zero deficit within 4 years. This could mean a 20 % cut across the public sector.Raising additional taxes won't work, we are at saturation point and the popoulation as a whole are tired of working hard just to be taxed to death.
Delaying above will just lead to further and deeper cuts in the near future,Gordon Brown is now in the same situation as King Canute...

Wealth is created by the application of labour to the means of production, converting raw materials into sort after goods. The process requires an additional element: finance. Once started, the process should, outside of difficult times, become self-financing, if successful. Unfortunately, the finance part is where a lot of money circulates; it's the place to be to get rich quick. Because of this, in a foolish world, manufacturing may be allowed to wither and finance takes over, producing and selling nothing more than paper promises. But, promises are not wealth and, in the long-term, cannot be used to pay debts.

What have we done over the last 50 years in the UK? Yes, we've been foolish and let finance take over. That's why, however big we claim our GDP to be, we have a gigantic problem to re-pay our debts and why we are far further up the creek than Japan or Germany.

Hi Stephanie

Interesting post. Your choice of the word 'depressed' in the same sentence as 'the conservatives' is subtle - very subtle, and very spin manipulative.

The message isn't depressing but 'reality'. I've met your sort before in management - very dangerous.

Keep to the facts and the evidence. This is an official warning - next time a complaint goes in if you can't hide your bias - you may fool some of the people (see #53 for example) but not all - certainly not on this blog.

As Simon Bailey #8 pointed out (amongst others) there is an inherent increased cost of borrowing (a few billion) on our soveriegn debt (rating agency comment is a red herring). This can only increase as our sovereign debt increases.

Once QE stops we shall then see just what is the true cost of borrowing on gilts. My previous estimate of c. 6% I don't think will be far out given the state of the economy. Just think on £1.4trillion debt (2013-2014) that's around £84 billion in interest which is not far short of the cost of the NHS on an annual basis.

Depressing. No - just getting real - I'm too optimistic re my own business for that. But then somebody's gotta pay taxes haven't they to pay for it all?

Please stop spinning else I will really have to review paying my BBC license.....

Investors are shorting gilts and have been for some time.

#56 Many thanks for that most informative post.

re # 32: The reason that Fund Managers and Investment Analysts for the major financial institutions are wheeled out to comment on various economic topics is because:
Fund Managers control ridiculous amounts of money that when it all moves in one direction has the power to distort markets positively or negatively.
Investment Analysts issue buy,or hold (practically never 'Sell' interestingly) recommendations to these same huge institutional investors which again moves markets.

The actual 'economics' behind what affects the prices of stocks & bonds and the value of currency is really little more than smoke and mirrors. Economic 'Theory' makes implicit assumptions about human behaviour at the micro (Individual) level which is then applied at the macro (National Population) level with absolutely no empirical evidence to suggest that the two are linked or any consideration of dissenting evidence. At the simplest level an economist assumes everyone acts out of pure naked self interest and is unable to come to terms with the undeniable fact that not every human being sets out to seek a competitive advantage over their fellows, or has maximising the acquisition of material goods as their primary aim in life.

One of the oldest economic 'jokes' exemplifies this attitude -
Two Chicago School economists are walking down the street and see a $20 bill on the ground.
“Look,” says one, “a $20 bill!”
“Impossible,” says the other. “If it were there, someone would already have picked it up.” and so they leave it there,still supremely confident in the rightness of their views...

The World Wildlife Fund has recently issued the first ever comparison of countries on the basis of sales of their clean technology products. It includes the 27 EU member states and all G7 and BRIC countries and the major renewable energy and energy efficiency segments.

A country’s position in the ranking reflects its ability to produce and sell products and services that reduce CO2 emissions. High ranking countries also generate high economic value and employment for a skilled workforce. Denmark, Brazil and Germany lead the ranking. China is the sixth largest.

The UK is 20th. That's 20th out of 27.

Sums up everything about this Govt rather well I think.

In a hole dug by the banks and dependent on the government to get out. How much worse can it get? "Ratings", that should be about number 20 on the list of concerns.

Will banks lend money to the taxpayers that bailed them out? Probably not, but that tells you all you need to know about banks.

Note to governments: would be unwise to attempt second bailout for whatever reason may arise.

Greetings from Sunny Singapore !! The weather is fine, here. In fact, everything is fine here. If they don't like what you are doing, they'll fine you !! As they say, Singapore is a fine city !! :-)

Meanwhile. back at the ranch -

"One would be to point out that this is not the same as a downgrade - it's merely a reflection of market sentiment. And market sentiment can go up as well as down."

If it walks like a duck, swims like a duck and quacks like a duck, the Singaporeans are not likely to make Chicken Casserole out of it !!

Britain's income/expenditure to debt ratios are not exactly encouraging a huge stampede of locals to invest the cash that's burning holes in their pockets in Gilts !! In fact, the Yuan seems to be the flavour of the month here.

This is especially true when the more "adventurous" Brits were toasted in the hot Dubai sun !!

More to come after I've soaked up a few more Singapore Slings on the beach !! Having fun !! Wish you were here ?? :-)

#65 "Denmark, Brazil and Germany lead the ranking. China is the sixth largest."

Considering that the total population of Denmark is less than that of most Chinese cities, that not bad going. Now, all they have to do is to stop making those horrible little plastic bricks that get underfoot on Christmas Day and their ranking may go even higher !!

#53 "Osbourne has talked our country down and should be lynched!"

Osborne is not "talking the country down". It's the foreigners that are so *NOT* taken in by the NuLabour spin machinery. They know what they see and they are pricing things accordingly !!

They also see comments such as yours and they think that, if this is the general thinking in Britain, then it bodes ill for any of their future investments in Britain. They are hard-headed businessmen and any refusal to face the facts as they are sticks in their craw !! They didn't get rich by being foolish !!

61 I am not as daft as you think I am.....Stephanie's piece is grim and dangerous and probably will cost us a billion quid as it is goading the credit raters into downgrading us.....do Germans and Americans have such a self-destructive media?
Fact is UK never defaults and it's starting to bounce back, our economy has outperformed Europe for 14 out of 16 years, there is not a negative equity problem in the UK any more, our banks are THE most cautious lenders ANYWHERE in the world (now)and the fact that the government wants to tax windfalls shows that those banks are making big bucks and will be paying a heck of a lot more corporation tax and VAT than they did last year,and their employees a heck of a lot more NI and income tax,and shareholders alot more CGT....
Give the country a break Stephanie.
What if, what if INSTEAD...David Cameron turns out to be a disaster and we are stuck with him......can we have an economic analysis of likely impact Conservatives will have on the economy and interest rates and unemployment based on past performance and past knee-jerk monetarist tactics?
Does our Sovereign debt cost us more than other countries in absolute percentage terms , PER PENNY BORROWED ,or is it that with our base rate half a percent lower , there has to be a premium to match Eurozone's?
Is that what the difference is.
AND OUR BASE RATES WERE ALWAYS USUALLY HIGHER THAN EUROPE'S BY A PERCENTAGE POINT , AND USUALLY HIGHER THAN USA'S TOO.....BUT TO COMPARE US WUTH BASKETCASES IS UNFAIR,UNTRUE AND DESTRUCTIVE.
Should your main point not be that these same credit agencies are the ones who issued AAAs on useless mortgage bundles in USA, that we got screwed by a needless lack of confidence in our own banks, and that Britain is a blooming good bet.
What is the point of a government agency like the BBC slagging our economy to death?
Should your main point not also be that we have managed to rescue ourselves from the brink and are paying tiddlywinks for the money we have borrowed and congratulations for this and with the market improving it looks like we are going to be ok.
And the resue of Dubai has not merited a single sentence in the Economics page....is that not a piece of good news that shows that we are all coming round and that sovereign nations are not going bankrupt.That will help sovereign debt ratings quite a bit.....added to which the Sep-Nov GROWTH OF THE UK ECONOMY which has also been ignored by your column will have a very beneficial impact on the perception of our economy......yes it has been rotten but we are nearly there.
Fact IS THAT BROWN HAS ALWAYS BEEN PILLORIED BY THE ECONOMIC MEDIA BUT ALWAYS DELIVERED THE GOODS......IT IS HIGHLY LIKELY THAT THE UK IS GOING TO OUTPERFORM ITS SOCKS IN THE NEXT FEW YEARS.BUTif we said how good it would be we would be pilloried for being overoptimistic.
We are damned if we sound pessimistic and we are damned if we sound optimistic.
How come no pundit predicted the 50% stock market rally in 2009?
How come no pundits predicted the 10% house price recovery?
How come unemployment is not as bad as we thought it would be?
And if the banks are so grim how come their shares have tripled in 2009?
How come our car market has bounced back?
How come Hamleys have expanded into Glasgow and are absolutely mobbed to the gunnels?
The success of LLoyds' share issue is also a great sign that investor confidence is returning.....and that, my dear Strephanie ,is what the whole shebang is about!
It's the Economy ,Stupid!
You are sounding so Noughtie .....cheer up and be a bit more Teenie!

Sure, when a government spends on anything it can be said there is waste....if you don't think looking after people with mental health problems, helping build new hospitals and schools is productive than what can I say?....but in simple economic terms the government high spending is what has saved our bacon in this recession.......it was not government profligacy that got us into this mess, it was an overexuberant private sector carriage that momentarily flew off the rails .....Don't blame the Fat Controller....it was government good husbandry that got our debt down in the good times so that we have been able to borrow money now.....just about every building company which has survived, every brickmaker ,every roadbuilder....has survived because of government spending.
Look at the money for the Olympics....what a waste.....
Yes, but it has saved London from total collapse!
I haven't heard Boris moaning about the Olympics, by the way.....is he hedging against a CAMERON FLUFF-UP?
OK suppose the money could have been better spent......no denying that not every penny was soundly spent.... it still ended up with lots of... VAT, INCOME TAX,NI, TV LICENSES,PETROL TAX AND PENSIONS TAX......
MOST OF IT ENDED UP BACK IN THE GOVT COFFERS......
AND ON THE WAY:
KIDS GOT NEW SHOES, BEER GOT DRUNK, HOUSES GOT BOUGHT AND SOLD,
AND GRANNIES GOT LOOKED AFTER ....
and the banks stayed open and the riots never happened ....
life went on,
when it didn't in Iceland and Ireland.
And when the economy picks up and the private sector gets going again, those companies are ready and waiting to get involved....
and you betcha, THOMAS the UK TANK ENGINE will be puffing merrily again before you know it........
... on track, on target and on time!
THE IDEA THAT NOTHING GOOD WILL COME OUT OF THIS RECENT BIG SPEND IS ALSO A MYTH.
YOU GOTTA SPECULATE TO ACCUMULATE!

Onward-ho

Not sure what you've been smoking.....

I recently read a book about the Man who started the second World War, Alfred Naujocks, an SS man, and one of his plans to destablise the UK in order to win the war was to print Millions of Fivers. Interesting really, as Gordon is telling us that is what we need to save the UK.

YOU GOTTA SPECULATE TO ACCUMULATE says onward-ho. Well, I guess it depends what you are speculating with and what you are accumulating. Bank Capital for CDOs doesn't seem to have worked too well.

#61 Rugbyprof,

Now look at your tirade in the mirror. YOU are allowed to posts your biased thoughts so why are you attempting to silence anybody who happens to express a view that you disagree with?

This is a blog and even the host has the RIGHT to air whatever opinion they have provided that they do not contravene the House Rules.

RE: 70. onward-ho

"61 I am not as daft as you think I am....."

Err ... no, I won't.

"Stephanie's piece is grim and dangerous and probably will cost us a billion quid as it is goading the credit raters into downgrading us....."

Are you for real? If she has that much power we are home free. We slip her the odd hundred million in return for a couple of upbeat articles claiming everything is fine and we'll be awash with foreign money! You wish.

"Fact is UK never defaults "

Oh for goodness sake, how many times? This is false. Got it? False. As in factually incorrect. The UK most definitely has defaulted. It did so after the first world war and the damage done to our credibility persisted well into the second. We would have defaulted in 1941 but the US underwrote our debts - tell me, do you believe that will happen again? We would have defaulted again in the 70s but for an IMF bailout. Surprisingly, that was under a Labour government too.

"and it's starting to bounce back,"

As in growth of minus nought point three per cent last quarter - that kind of "bounce back"?

" our banks are THE most cautious lenders ANYWHERE in the world (now)"

Honest officer, that's my last burglary. I swear. I'm a reformed character.

"and the fact that the government wants to tax windfalls shows that those banks are making big bucks and will be paying a heck of a lot more corporation tax and VAT than they did last year,and their employees a heck of a lot more NI and income tax,and shareholders alot more CGT...."

You don't have the tiniest glimmering of a clue do you? Large parts of the UK banking sector have gone for good (Northern Rock, the London parts of Lehman Brothers and Bear Stearns ...) others are a shadow of their former selves (RBS, HBOS ...). None of those are going to pay anything like the tax that they used to - regardless of the new taxes that get invented. That's what people mean when they talk about a "structural deficit" - the tax that's gone and won't come back even after the economy recovers. CGT is paid when you realise a capital gain on an asset. That's not a problem that will afflict many Lloyds, RBS or HBOS shareholders any time soon. You are living in a fantasy land where financiers who are lavishly paid to make profits by moving money around somehow forget all that when asked to pay higher taxes and just meekly hand over the cash. That's likely isn't it?

"What if, what if INSTEAD...David Cameron turns out to be a disaster and we are stuck with him......"

Then we'll have 5 more years like the last 12.

"Does our Sovereign debt cost us more than other countries in absolute percentage terms"

Yes. Read the original article. That's the whole point.

"BUT TO COMPARE US WUTH BASKETCASES IS UNFAIR,UNTRUE AND DESTRUCTIVE."

Don't be such a drama queen. We are facing a major debt crisis with no credible plan to respond to it.

"Should your main point not also be that we have managed to rescue ourselves from the brink and are paying tiddlywinks for the money we have borrowed and congratulations for this and with the market improving it looks like we are going to be ok."

No. It should be that by printing and borrowing gigantic sums of money the government has delayed the crisis at the cost of burdening future generations with a crushing burden of debt and long term decline. You do understand that under current plans UK government debt is headed for at least 110% of GDP before it stabilises? You do understand that there is no chance of that debt ever being repaid? You do understand those things, don't you? Tell me, what will the interest on a debt of 110% of GDP cost us when interest rates return to normal?

"And the resue of Dubai has not merited a single sentence in the Economics page...."

So if it's such a big secret how come we all know about it?

"is that not a piece of good news that shows that we are all coming round and that sovereign nations are not going bankrupt."

No. See Greece. And Ireland. And Latvia. So far.

"added to which the Sep-Nov GROWTH OF THE UK ECONOMY which has also been ignored by your column will have a very beneficial impact on the perception of our economy......yes it has been rotten but we are nearly there."

Guess again. Yes, there will be growth in Q4 2009, fuelled by Christmas spending, seasonal jobs, VAT and stamp duty relief. What do you think will happen in Q1 2010 when the Christmas jobs evaporate, retail spending stalls and VAT and stamp duty go back up?

"Fact IS THAT BROWN HAS ALWAYS BEEN PILLORIED BY THE ECONOMIC MEDIA BUT ALWAYS DELIVERED THE GOODS......"

Well, he has if you define "GOODS" as debt that will still be a burden when my grandchildren are paying taxes.

"IT IS HIGHLY LIKELY THAT THE UK IS GOING TO OUTPERFORM ITS SOCKS IN THE NEXT FEW YEARS."

No, stop, my sides are killing me! You should be on the stage. "OUTPERFORM" - with what? What part of the UK economy is capable of delivering that? Go on, tell me it's the finance sector. After all, they've done so well up to now.

"BUTif we said how good it would be we would be pilloried for being overoptimistic."

I'd opt for "deluded".

Enjoy Q4. The statistics will all look promising. Best stop reading when we get into Q1 though.

72 Not smoking, just a breath of fresh air in Doomsterland.

Spartacusmartyraaas will never be downgraded by the QE'rs inflationaaairy thrust ,it is only modesty that prevents him revealing his true identity ie [shhh!] Spartacusmartyraaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa's and no Moody goaded types CAN EVER TAKE all of that AAAAAWAY


Britain willarf its deaficit even if it haaa's to print the required stuffenomix


perhaps ole MacGordonald ducker on quackok'n should not have snorted over faaaaaam UK ei ei...ou

76
ACTUALLY, STEPHANIE IS ECONOMICS EDITOR FOR THE BBC,WRITING ABOUT THE PERCEPTION OF UK'S CREDIT-WORTHINESS. HER THOUGHTS ARE IMPORTANT AND INFLUENTIAL.
AAA means we are ok,so far.Let's not rock the boat.We didn't have a German 1926.We didn't do a China on our bonds.And we reacted well to 1976.
We are Mensches.
It was Xmas last year too.This one is different.Last year with a falling income, a monthly interest bill of far too much,a bank that was skint and liked to say no , Santa went to Oxfam and I was looking into the abyss. This year I've worked like a dog ,it's Party-time, and my interest bill is 25% of what it was, I have no current account overdraft and no credit card bills, and the bank,if it doesn't yet like to say yes.....it is starting ever-so slightly to nod its head at my next big move.
Of course our sovereign debt costs us more....we need it .....but does it cost us more than it used to in actual terms? The genius of this crunch is that it is costing us buttons.
Now Germany is wondering out loud whether it should maybe have been a bit more British and Gordon was right after-all..... Greece is different.....the whole attitude to debt there is if anyone is daft enough to lend you anything.... do not ever pay them back! and Ireland was UK x 100.......we are saintly in comparison.And Latvia.....no I don't think so.
Dubai was the example par excellence of impending sovereign default affecting sovereign credit ratings,and the fact that it looks like it is going to be okay now, and our banks too, is not irrelevant and is important .....AND SHOULD HAVE BEEN MENTIONED.
AND ANY GROWTH AT ALL IS BIG NEWS AND WELCOME.
Q1?.....One step forward two steps back.....we'll get there.
Fact is ,I am surviving,I am spending ,and I am growing.....and I am not alone....although it feels like it on this blog!

Can I pose the question on the impact of a UK rating downgrade to UK financial institutions providing protection through CDS.
Would a downgrade trigger a credit event forcing masses of UK financial institutions to payout on the CDS insurance contracts provided to investors?
Do we know the notional value of these UK Sov CDS's?
This could be another disaster and another reason why a UK downgrade is not an option.

At this rate our beloved government will soon be borrowing more just to pay the interest on our current debts which will mean even higher interest payments which will mean even more borrowing ad infinitum. As Oliver Hardy would say "Another fine mess you have got us into"

#76 Hants_GW Excellent post.

We now need to look for solutions fast. There is an upcoming general election. It seems to me that there is no way, given out political and media hierachy, that the necessary reforms can be made by any party.

The career politicans do not even seem to be aware of the abyss they are dragging this country into. Even if they are aware they do not have the political will to make the necessary changes. I had hoped that the Conservatives might change things for the better but if Cameron is unable to take action against his own MPs for legally avoiding tax on second homes paid for by the taxpayer, what hope is there that he can take on the banks, even if he wanted to.

The example that sticks in mind is the Iraq war. At the time everybody knew it was wrong to invade and that Blair had an agenda but Parliament still voted it through. That showed me how gutless and impotent our parliament was. Things have not changed and have probably got worse.

The only suggestion I have is that as many independent candidates as possible stand in the next election in every seat under the banner of banking and political reform. Perhaps if the public are finally ready for change, enough independents can get elected and a new political consensus can take us forward in a more sensible direction.

At 76. At 00:22am on 16 Dec 2009, hants_gw wrote:

Your post was very amusing as well as informative and was wondering if you could help as I am in know way an expert. I do agree we are in serious trouble but essentially we are talking about the £ (pound) however, Austria, Portugal, Italy & Spain are the Euro. In currency terms surely the Euro is the currency which is also overrated in terms of the combined debt. I haven't even included the eastern european countries in to the equation.

Am I correct in thinking this?

The actual problem with a downgrade is that certain parties may be prevented from holding your debt or using it as collateral if term sheets on trades specify AAA rated instruments as collateral. This could, in itself, spark a sell-off. Perhaps then the debt office will care?

Would you lend money to a country that is run by criminals, and can't even pay the interest on its debts?

It is amazing that we have any credit rating at all. Our only asset is the people who have not been fleeced, who have now taken steps to protect themselves from further robbery.

@76

As you like to stick to facts, please note that none of the three countries that you mention has gone bankrupt. In fact no country can go bankrupt, the worse ti can do is default on paying its debts. So far none of those three has done so. So don't accuse others of false facts when your own are not up to scratch either.

About not having a chance to pay off our debt once it reaches 110% that is also not correct we can and it is not a huge issue. Italy is at 120% Japan is at 170% so what? We may not be able to affort as many forgeign wars as we currently can but that is not the end of the world in itself.

About everything else you were broadly right, it will be hard to find something to pay our debts with as we don't make anything and the New Labour government managed to get our manufacturing output down to about 11%, but hey it increased our real estate & financil sector, so maybe we ship across to Germany and Japan some real estate agents in return for some cars:)

@83

No the EURO is not overrated Greece makes only about 3% of the Eurozone total, so even if you were to remove it altogether it would not make such a huge difference. Also taking Greece as the worse case in the Eurozone, that case is still not that bad. If it wasn't for the finance media that needs a "crisis a week" type news. As far as I understand it they are not about to default on their debt. easten europe countries do not yet use the EURO their currencies are pegged to the Euro but they are not part of the Euro. the only 4 new countries that use the Euro are Cyprus, Malta, Slovakia & Slovenia. So, no the Euro looks sound and they have Germany there that is if not the largest exporter in the world the second largest after the Chinese, but they may still be the largest.

70.

"How come no pundit predicted the 50% stock market rally in 2009?
How come no pundits predicted the 10% house price recovery?
How come unemployment is not as bad as we thought it would be?
And if the banks are so grim how come their shares have tripled in 2009?
How come our car market has bounced back?"

Answers:
Because the rise is based on printing money not real growth.
Because the rise is based on printing money not real growth.
Because we've printed loads of money to limit it.
Because we've printed loads of money and given it to them and transferred their debt to the taxpayer.

You need to take off your rose tinted specs and understand that the "recovery" is just ANOTHER debt fuelled bubble to get us to the election.

Any downgrade is not going to because the Stephs article, its because printing money devalues investors' holdings and invetors seem to have grasped that.

@86 ChrisArta

Thats great but in an economic environment where the biggest spenders over the past 15 years no longer have the money or the appetite to buy goods what use is it if your nation relies on selling products.

@88

It is of more use, than our nation relying on having nothing to sell!!! I don't understand whats your point here? They are not in a recession, they have a goverment decifit of about 3.5% (we have 13%) they have a trade surplus we have a deficit and you still can't see the difference?

Looks like the ratings agencies all took their exams in the UK.

Standards may be falling but everyone still gets AAA...

The £ has already devalued against most currencies by 20% and we are now paying .3% - .4% extra to service our national debt. As Flash correctly stated, we are "uniquely placed" to deal with this recession. Roll on the election.

#80 - "Can I pose the question on the impact of a UK rating downgrade to UK financial institutions providing protection through CDS.
Would a downgrade trigger a credit event forcing masses of UK financial institutions to payout on the CDS insurance contracts provided to investors?"

It would depend largely on the precise terms of the CDS. From what I recall a downgrade below a certain level could be considered a "credit event" and trigger payouts under CDS. As someone already mentioned it's also going to cause problems with funds that are only allowed to invest in AAA bonds - not only would they not be allowed to buy UK gilts any more but would potentially have to sell their existing holdings.

"Do we know the notional value of these UK Sov CDS's?"

I'm sure someone closer to the market than I can help out. But it's probably going to be very hard to know the total value of so-called naked CDS trades. A CDS is like an insurance policy but when you don't have to own the underlying asset... one might liken it to me taking out insurance against your house burning down. A lot of time they are used to protect a bond (so in the event of default etc the CDS covers the loss in value), a lot of banks had (probably still have) CDS flow desks where they make a market in CDS and flatten their positions (taking the bid-offer spread as profit for themselves). Still others use CDS trades to create synthetic bond positions (either in isolation or in the context of another derivative like a CDO), and others for speculation. It's the speculation that's most likely to be the problem, because they are the ones least likely to have a structure around the CDS and therefore most likely to take a massive hit if they do have to pay out.

"This could be another disaster and another reason why a UK downgrade is not an option."
From what I recall of a few companies well known for their creditworthiness were rated AAA right until the end. If I recall LTCM was AAA rated until they collapsed. There have been all sorts of questions raised about the impartiality of rating agencies, many of which boil down to a question of who pays for the rating and who might have conflicting interests.

RE: 86. ChrisArta

"@76

As you like to stick to facts, please note that none of the three countries that you mention has gone bankrupt."

You're right. It's a fair cop. I should have been more precise in my language.

On the other hand, if the UK follows the example of say Latvia - or even Ireland - the fact that we aren't officially bankrupt will be cold comfort to a lot of people.

"About not having a chance to pay off our debt once it reaches 110% that is also not correct we can and it is not a huge issue."

That's two different issues and you are wrong about both. I'll start with repayment.

I said there is no chance that we will repay that debt - and that's true. To have any chance of repaying the debt, the deficit will have to fall to zero and then some. That means closing this year's gap of £175 billion - and then finding more tax rises or spending cuts on top of that in order to actually repay something. Yet in the recent PBR spending went up. The current government might reduce borrowing to 6-7% of GDP in four year's time, but most of that reduction will come from economic recovery rather than tax or spending cuts and even so depends on some highly optimistic assumptions such as sustained growth of over 3% for the last three of those four years. To actually re-pay anything we have to go on to eliminate the whole of the remaining deficit - equivalent to around £90 billion per year - and that's after the four years of spending squeeze and tax rises that Darling has already promised us. So given a decade or so of high taxes and declining public spending we might get to zero deficit. Then we have to start repaying. An additional round of tax rises and spending cuts (that's on top of the previous ten year's worth of course) might get us say a 5% of GDP surplus - an absurdly large sum in reality. Another ten years of living like that might get the debt down to about 60% of GDP - meaning about where it is now. So that's twenty years of rising taxes and falling public spending - do you see any electoral problems with that? And that all assumes that we don't have another recession (or two) in that time. We are ten years of austerity away from (maybe) just stabilising the growth of the debt. No government will have the backbone to go beyond that.

You also observe that 110% of GDP debt is "not a huge issue". At that point interest payments alone will be around 4% of GDP, or about 10% of normal government spending - about three times the pre-recession level. Either taxes must rise or public spending fall to accommodate that - unless of course we increase borrowing to pay the interest ...

You are right that this is not "the end of the world" in the sense of some overnight economic crash. It is in fact a recipe for prolonged slow decline as high taxes strangle economic growth and squeezed public spending drive demands for more unaffordable spending increases. Your comparison with Japan is ill-judged. They can call on a vast balance of trade surplus and an obsessive domestic saving culture that we will never have - and their economy has been struggling for years, hence the references to Japan's "lost decade". Living with the debt will be hard - a choice between permanently higher taxes, falling mainly on middle income earners or permanently squeezed public spending, until the electorate get tired of the hair shirt and vote for a new round of borrowing.

According to our present government, the correct response to a recession is to borrow vast amounts and you are suggesting that it's no big deal to never repay it. When our debt is at 110% and the next recession hits do we use this plan again? And the one after that? Where does it stop?

Slovenia is a Euro country with low levels of debt. It has a more sustainable budget deficits as well. It is not a surprise that it is rated better by the markets than the UK, where taxes woudl eed to icnrease by 30% to sustain current spending.

#92 - A CDS is a standardised contract & a "credit event" is classified as one of 3 scenarios. A default, a bankruptcy or a restructuring of outstanding debt that disadvantages existing senior debt holders. Downgrades do not qualify.

In terms of quantifying the number of naked CDS positions in the market - as you say that's pretty much impossible but considering you could probably trade 100m - 200m in Sovereign CDS in one go, the numbers we would be looking at would be astronomical. It's no wonder Warren Buffet called them "Financial WMD's"

The Ratings Agencies are just one more piece of the system that has been captured by the kleptocracy. This is not controversial. Look at the ratings of each of Enron and Lehmans until virtually seconds before their collapse. Look at the triple AAA awarded to vast swathes of toxic sub prime garbage. You cannot do these things by accident or stupidity.

As even the BBC subliminaly acknowledge the people with money know enough to essentially ignore their ratings on sovereign entiries. A formal downgrade of either the US or the UK will trigger a further debt collapse somewhere in the system - so it wont happen, or at least it wont happen until the situation is transparantly obvious to everyone and their dogs.

With regards to the US and its little playmate the UK there is no intention of ever paying the debt back. It is very simple the debt (in aggregate: personal, government, PFI, and unfunded liabilities) is of such a magnitude that it cannot be paid back, therefore it will not be paid back.

People remain deluded. This is not a business cycle or a credit cycle. This is system collapse. This is the end of the US$ as world reserve currency, and this has consequences.

Everyone wants to blame someone else. People in the City want their bonuses, BA staff want their salaries, the public sector wants its jobsworth mentality and super indexed pensions, and people want their house and other asset prices to rise continously. But you can´t always get what you want. You especially can´t get what you want when you are facing system collapse.

When I have cash, the bank wants to give me lots of cheap money , but when I need it ,it is much more wary and wants to charge more for it.They are desperate to charge more, and they pay for ratings that help them to make more money.
When the banks are only getting a percent for their interest, the difference between half a percent here or there is big,but in real terms the difference is tiny compared to the variation we have seen in base rates.
Credit criteria everywhere have tightened ....and boy does the UK need the cash...what can we expect but for ratings criteria also to vary?
However, do we want our credit-rating to fall?...No, of course we don't......Do I write to my banker saying please Mr Banker , you shouldn't be giving me money in future ,I am a bad bet .....should we not be arguing our case for a good rating as it will save the country billions.
Not everyone understands that the BBC is a neutral organ.....in other countries, where broadcasters are under the cosh,people would be interpreting a blog like Stephanie's as the government or factions of it fighting within and wanting to make criticisms heard, which can only add weight to the argument for downgrading.
The duty of every good journalist is to sniff out a story....the story is there , but maybe IN SOME CASES it is best not drawing too much attention to it.....what would be interesting to hear from you, Stephanie is your thoughts on the decision to shield information about the bank bailout last year from the media, and how that positively affected the outcome ...in contrast to Northern Rock, where the decision to help the Rock out caused a crash when the media splashed it on the tv....and to discuss how much impact,or how little, the media have on public perception.And since recessions are all about perception, what can be done to improve confidence.
Can we give articles an Economic confidence rating....say starting this one at minus 10?
ON THE OTHER HAND TURNING YOUR COLUMN INTO A PROPAGANDA VESSEL WOULD ALSO BE A BAD IDEA.
BUT AT THE MOMENT WHAT WE ARE GETTING IS LIKE SOMEONE WHO KEEPS PICKING AT A SPOT BECAUSE THE SPOT IS THERE.........BUT DON'T PRETEND THAT PICKING AWAY AT THE SPOT DOES NOT MAKE IT WORSE.
Now you could be cynical and say that everything the government and The Bank of England do is self-serving, or you could argue that they are doing their best to help the country out of this situation and deserve support rather than humiliation.
Now we all pay for the tv license.....many on this blog love reading about this government being a disater, but I think in the current economic circumstances Britain needs all the help it can get, and that includes help it can get from the BBC.

"Ah well....it could be worse, the U.K. could be in the same position as Iceland, Ireland and Greece. Then again, perhaps the U.K. is.
Perhaps it's time for the Bank of England to fire up it's printing press and start producing more notes."

The point is that we CAN devalue our currency and print more money. Ireland & Greece being in the Eurozone can't. Worse Ireland, and especially Greece depend on a lot of British tourist money.... this year Greece's hotels have been empty.

Stephanie

In September 2005 you did an item on Mr Brown's "UK Economic Miracle." Among other things you reported:

"What is left of the miracle economy, if you strip out the cheap imports and the consumer spending? What is left is a lot of public spending. The only part of the economy that has grown faster than spending by all of us the past few years has been spending by the government.

In the north-east, one recent estimate puts the public sector of the economy at close to 60%. That's roughly what it was in Hungary before the Berlin Wall came down.

Gordon Brown has certainly left his mark on the area, and put a lot of people in work who might otherwise have been unemployed. The number of private sector jobs in the region has shrunk since 2001. The public sector workforce has grown by around a fifth."

I think that if you look at public sector employment in the North, Scotland and other regions where Labour has its main support bases, you will find a similar story. The government cannot afford to introduce cost cutting before the election, because that would "condense" the vapour that is sham employment. Condensation will happen next year, and become a flood as the Conservatives balance the books. They will be called heartless and accused of bashing the working classes.

Meanwhile the country has borrowed and borrowed to keep up this pretense of busy-ness. Mr Brown believes that pretend jobs help to fuel demand that helps to create other jobs. He doesn't realise that the KIND of job is important. He probably still believes that Hungary in the seventies/eighties was a model society for us to copy. That's why he is caricatured as a Stalin-figure.

Still, let's be positive. Now that he's fixed the economy here, Mr Brown is free to spend a few days in Copenhagen solving the climate problem.

Sorry all: my 99 was for the next blog...

I report myself for being off-topic. Do I get a prize?