Thursday, January 28, 2010

Resting On A Bed Of Nitroglycerin In The Ring Of Fire

Are you sitting comfortably? Then we'll begin.

As you may have already seen, the world's biggest and most influential bond manager has just passed a further and even more terrifying judgement on our precarious financial position (see this blog for previous warning). He now says:
"The UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower."
He describes us as sitting in “The Ring of Fire”:
"These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years’ time, which would slow GDP by 1% or more. The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth."
And here's his pic:

Now OK, we're not the only ones in The Ring. But we are the ones whose debt position is deteriorating most rapidly, simply because we have the highest annual borrowing. And some of our Ring companions, like Greece, are already starting to smoulder alarmingly.
The thing is, PIMCO's Bill Gross is not some small government fanatic like Tyler. He's not saying this because he's trying somehow to bludgeon HMG into cutting back the state. He's saying it because that's what PIMCO's analysis shows. And yes, he's almost certainly already sold his gilts so to that extent his statement can be seen as self-serving. And his chart is obviously dressed to impress. But if you think he's blagging, just read his newsletter.

So what does HMG have to say?

Treasury Minister and all-round decent man, Stephen Timms says:
"That company has made rather similar comments in the past. It is entirely untrue. We have continued to see a good level of demand for gilts. I only point to the fact that our auctions have been well covered and I am confident that we will continue to meet our needs."
Well, Tyler would probably say the same in Timms' shoes.

But the head of the government's Debt Management Office - the guys actually responsible for selling the £200bn+ of gilts HMG will need to flog every year from now to eternity - doesn't sound quite so sure. He tells the FT he's worried about the end of Quantitative Easing, the Bank of England's programme to fund the fiscal deficit by printing money:
“We are in a transitional phase in as much as nobody in the market knows what the next step of the Bank of England will be. That transitional phase is always going to be a pivotal moment for the market. We are moving from one state to another and that could increase the short-term uncertainty un-til it is clear what the MPC has decided on as their next course of action. It could mean we move into a different pricing environment.”
A different pricing environment, huh? That's certainly another way to describe a Ring of Fire.

Let's hope George and Cam are taking this in. Because although nobody expects the current bunch of clowns to do anything sensible about our debt, the markets won't be so forgiving with the new team. They will be looking for action, not talk.


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