I was not surprised by anything in the Darling Brown budget on Wednesday. I have covered most of the problems in my blog over the last 3 months, the huge debts, the problems with gilt issuance, the possible effect on the UK credit rating etc. The only new thing on the debt scene is that terrified of the effect a series of failed gilt auctions would have on the UK's credit standing they propose to issue longer dated gilts using what is euphemistically called syndication. This means longer dated gilts will be drip fed to the markets by investment banks who are GEMs, gilt edged market makers. This will be a £100 mn bonanza for these banks and will lead to more government financed bonuses for yes, the bankers.
Gilt edged yields will anyway have to rise to attract buyers and of course the issue price, the amount the government receives, will therefore fall. Gilts are supported at their current price by the Bank of England printing money to buy these gilts on its own account, the so called quantitative easing. But if the UK credit rating were downgraded from AAA the results would be catastrophic. Foreign central banks are big holders of gilts but they are only allowed to hold AAA paper. So if gilts go to AA + say there will be a huge sell off of gilts, prices will fall and yields rise. This will immediately impact the swaps market and swap rates will rise. So what you say? Well mortgage rates are set directly by swap rates so Joe Public will have to start paying through the nose again for mortgages and there will be nothing Mervyn King, Darling Brown or anyone else can do about.
Darling Brown know if this happens they are electoral toast come May 2010. All the spending cuts have been carefully scheduled to kick in after this election date but no one can control the bond market. As things stand if the UK retains its triple A gilt rating then it is a foregone conclusion Labour will still lose the next election but this does not mean the Tories will win enough seats to have an overall majority! There would be a hung parliament.
This would be the best result possible for the UK. I watched Question Time last night and the brilliant David Starkey pointed out to the three party hacks that what the UK really needed was constitutional reform. The current parliamentary system is not fit for purpose. We need a US type constituion with many fewer MPs, say 300, a small elected second chamber like the US senate and a seperation of the executive from the legislature. Its not the British way you say but if we dont change we are doomed to more Darling Browns and their vile associates. Starkey detests Scotsmen like me, also the Welsh and the Irish but he has the sharpest mind currently in the media and he is dead right and a great Englishman in the Cromwell mold.
If we get a hung parliament the Lib Dems will hold the balance of power and their price for supporting a coalition will be electoral and constitutional reform. The Tories will never agree but Labour desperate to hang on to power and keep on the gravy train will agree and therein lies the best hope for the UK.