Posts Tagged ‘uk debt crisis’

United Kingdom Officially Enters Double Dip Recession

April 25th, 2012 Comments off

For the first time in about 40 years, the UK has gone into a double dip recession. London’s Office for National Statistics reported a 0.2 percent contraction in GDP in Q1 of 2012. That drop, following a 0.3 percent fall in Q4, represents two consecutive months of economic contraction, meeting the technical definition of an economic recession.

The UK’s Chancellor of the Exchequer, George Osborne, said, “It’s a very tough economic situation. It’s taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime… over many years this country built up massive debts, which we are having to pay off.”

That sums of the UK’s economic and fiscal conundrum, and that of other advanced economies. The austerity measures required to trim back government deficits represent a fiscal drag on the economy. That in turn retards economic growth and reduces government revenues, countering the intended goal of the austerity measures. On the other hand, maintaining high deficit spending is unsustainable. The politicians have created problem that defies solution.



U.S. and UK Sovereign Debt Downgraded by China’s Leading Credit Rating Agency, Dagong: Loses AAA Status

July 14th, 2010 Comments off

A new force in assessing credit risks has emerged in spectacular fashion. Until now, Fitch, Moody’s and Standard & Poor’s have dominated the rating of investments, securities, bonds and sovereign debt. However, given the deficient performance of these three agencies in missing the sub-prime debacle in the United States, it is perhaps not surprising that a relatively new agency has arisen from the country that is now the leading creditor state within the global economy. Dagong Global Credit Rating Co. Ltd., founded in the People’s Republic of China in 1994, has issued its own rating of sovereign debt, and it’s not a pretty picture.

Dagong challenges its three Western competitors by downgrading the U.S. and UK, denying them the AAA status granted by the other ratings agencies. According to Dagong, the United States is rated AA with a negative outlook, while the United Kingdom is accorded an even lower AA-, also with a negative outlook.

When the leading credit ratings agency in the country upon which the United States and UK are most dependent on for purchasing their public debt downgrades their fiscal capacity and credit worthiness, it is a sign that the sovereign debt crisis afflicting a growing number of advanced economies is far from its peak, despite assurances from politicians and central bankers in Europe and the United States. Dagong may become an increasingly important player in the next phase of the global economic and financial crisis.

UK Austerity Budget Points to Continuing Fiscal and Economic Crisis

June 23rd, 2010 Comments off

As expected, George Osborne, Chancellor of the Exchequer in the new British coalition government, unveiled an emergency budget aimed at tacking the UK’s massive structural fiscal deficit. It is being described as the toughest UK budget since the age of austerity that followed in the immediate postwar period after the Second World War. It features a rise in the VAT to 20%, increased income and capital gains taxes, public service wage freezes and across the board programmatic budget cuts. The question that stands is this: will it work?

In my view, as explained in my book (Global Economic Forecast 2010-2015: Recession Into Depression) the United Kingdom, as with many other advanced economies, is in a fiscal and demographic trap. It’s national debt has skyrocketed to almost 70% of GDP; even with the Osborne budget cuts, continuing deficits will send this ratio towards 100% of GDP in the near future. With an aging population, meagre real economic growth at best and an economy that, like a heroin addict, has become dependent on its fiscal deficit fix, the UK economy is in such a trap.

Cut public spending dramatically, warn the critics, and the British economy will enter a double dip recession, and they are right. A renewed economic contraction will diminish tax revenue, largely defeating the purpose  of budget cuts and increased levels of taxation. However, continuing the neo-Keynesian debt folly is even more calamitous, for it will inevitably lead to a total fiscal collapse of the UK.

The real lesson is that the wild spending spree engaged in by policymakers in response to the global economic and financial crisis was flawed, and should have been curtailed before public debt to GDP ratios exploded to unsustainable levels. It is now too late to avoid severe economic pain. The only option left is determining which path will incur the least suffering on society.

UK Economic and Debt Crisis Approaches Dangerous Tipping Point

March 14th, 2010 Comments off

Amid the clamour over the Greek debt crisis, a far more perilous threat to the global economy is becoming increasingly apparent. The global economic and financial crisis has wrecked havoc on the United Kingdom’s public finances, with no clear path to salvation.

Consider the following statistics. Greece has a GDP of approximately $350 billion, compared with $2.2 trillion for the UK. In other words, the Greek economy is only 16% the aggregate size of Great Britain’s. The proportion of Greece’s annual deficit to GDP is 12.5%, a figure that has triggered the current Greek sovereign debt crisis and panic search for a bailout formula within the Eurozone. Yet, in the much larger UK economy, the deficit to GDP ratio has reached 13%, an even higher level than for Greece, which has aroused so much fear among global investors and policymakers. Furthermore, while the UK’s official public national debt comprises 68% of GDP, a figure lower than America’s and much lower than with Greece, that level of indebtedness is accelerating at a rapid rate. It must be recalled that only three years ago the UK national debt to GDP ratio was only 38%, and with double digit deficits now an inescapable fiscal reality in the United Kingdom, it seems almost certain that the nation’s public debt will exceed 100% of GDP within the next three years. Furthermore, it is widely believed by analysts and investors that off balance sheet public debts (as was similarly revealed in relation to Greece’s current debt crisis) and unfunded contingent liabilities significantly add to the official figures.

What do these dismal statistics tell us about the future trajectory of the UK’s profound sovereign debt and economic crisis? Consider what Kornelius Purps, fixed income director at UniCredit, Europe’s 2nd largest bank, told the British newspaper,The Daily Telegraph; “Britain’s AAA-rating is highly at risk. The budget deficit is huge at 13% 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.”

In effect, the UK economy is at a dangerous tipping point. Massive public indebtedness occurred as a result of the government’s bailout of its banks, yet businesses remain afflicted by a severe credit crunch. Massive stimulus spending has added enormously to the deficit, but the only result has been suspect figures that, if interpreted most optimistically, show that the UK’s economy has essentially flatlined after incurring a sharp contraction in economic output during the height of the global financial crisis.

The predictable outcome, as alluded to by Kornelius Purps, is that in the future the UK’s treasury gilts will be unable to finance the nation’s prodigious borrowing needs with historically low interest rates. At some point, perhaps sooner than many realize, interest rates on the UK’s debt instruments will rise precipitously. This will occur while GDP growth is at best sluggish. Sharp reductions in public spending will almost certainly tip the economy back into deep recession, further constricting revenue  and maintaining London’s fiscal imbalance. However, the alternative is even more unpalatable. The sovereign bond market will demand increasingly higher yields, leading to a fiscal reality that is unsustainable. Ultimately, the United Kingdom will face the real prospect of national insolvency, with all the predictable dire consequences.

This grim trajectory has an even darker meaning for the United States. As bad as the UK’s fiscal situation is, America’s is far worse. Its annual deficit to GDP ratio is only marginally lower than Great Britain’s. Furthermore, its national debt to GDP correlation is significantly higher. More importantly, the average period of turnover on the United Kingdom’s debt is 14 years, compared with a mere four years on U.S. Treasuries. Once bond yields start to rise, the short term structure of America’s national debt will incur a vast increase in annual interest payments.

It seems to this  observer  that it is only a matter of time before the UK sinks into an irreversible sovereign debt cataclysm, with the United States not far behind. Anyone who believes that the same political establishment and financial elites that have led both nations to this hellish fiscal precipice can now lead us to a sustainable solution is, in all probability, being excessively hopeful.