Boy are things getting ugly in the U.K. The pound is getting crushed. The price of long-term British debt securities, called gilts, is plummeting, and the cost of default insurance on the country's debt is rising steadily. We have another " perfect storm".
My takeaway: This is but a preview of what's to come here in the U.S.
Why the Crisis Is Coming To a Head in the U.K.
Britain's finances are in shambles. The country's budget deficit is running at more than 12 percent of GDP, roughly the same as in Greece. According to Bloomberg reports, for the first time, the UK recorded a whopping $6.7 billion deficit in January, much worse than the $3.9 billion SURPLUS UK economists were expecting. Why they were expecting a surplus at the rate at which they are printing currency, I can’t imagine, but that is what is reported.
The U.K. government is planning to sell $349 billion in debt this year, the most ever, to cover this deficit. But, not unlike many sovereign debt backed bonds, demand is flagging, with foreign investors dumping the most U.K. sovereign debt in nine months in January and yields generally rising. As with the US, China and the Oil Kingdoms are the largest holders of Her Majesties’ bonds.
Then a few days ago, the crisis came to a head. The catalyst: New polling data that threw the British political outlook into chaos. Polls showed that the Conservative Party's lead over the Labor Party shrunk to its lowest level in more than two years. Mr. Brown’s shenanigans are coming home to roost. Growing unhappiness with failing social programs, healthcare scandals, rapidly rising unemployment, rising taxation and expanding EU influence over the labor parties’ leadership on such issues as global carbon taxation are taking a high toll on the British Fabian Socialist rooted labor party.
Many Brits are looking to return to the prosperity of the Thatcher days – or even the relative prosperity of the Blair regime, when the labor party at least recognized the need for an open relationship with the free markets.
It now appears that neither party could come out of spring elections with a clear majority, leaving the U.K. with a "hung" parliament. That would make it much more difficult for the government to reduce the nation's debts and deficits.
With all of that, it's no wonder...
• The British pound plunged six days in a row, its longest series of declines since October 2008.
• The yield on 10-year U.K. government debt recently hit 4.27 percent, compared with a low last fall of 3.44 percent.
• The cost of protecting against a British debt default in the credit default swap market surged to more than 101 basis points, or $101,000 per $10 million of debt. That's up from around 44 bps in the fall.
Striking Similarities to the US
You don't need a Ph.D. in economics to see the striking similarities between the situation in the U.K. and the situation here in the U.S.
• Our debt situation is totally out of control, with the national debt on track to double over the next decade to almost $19 trillion.
• Our budget picture is a mess, with $8.5 trillion in deficits projected over the next 10 years.
• Our foreign creditors are starting to sell our bonds, with China alone dumping $34.2 billion of Treasuries in December, the most ever.
And politically, we're facing the same gridlock and inaction as the U.K.
Just look at the deficit commission nonsense...
President Obama had to create an 18-member panel by executive order because Congress voted down an earlier proposal. Since it's a presidential commission, Congress can just ignore any findings. And those findings won't even be released until December 1, for purely political reasons (that's after the mid-term Congressional elections).
Lastly, just like the U.K., we have bailed out, backstopped, or otherwise taken over so many institutions and segments of the capital markets that our own balance sheet is getting shakier and shakier.
"If core sovereigns such as the U.S., Germany, U.K., and Japan 'absorb' more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle."
"The sovereign debt crisis is subprime all over again." — Bill Gross, manager of the world's largest mutual fund.
Bottom line: We're running this country's finances off the rails. And just like in Greece ... Ireland ... Spain ... and now the U.K., it's going to come back to haunt us.
Omar P Bounds III
The Bounds Auction Company
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