Monday, 21 December 2009

Endgame for Club Med & UK

The bond market is sovereign and its power is limitless. The Greek bund spread is now 250 basis points and their credit rating has been downgraded by a second ratings agency. The same fate awaits the UK indeed one commentator remarked that if the word Greek was replaced by UK in the S&P downgrade note no other changes would be needed!

The UK bond market has one slight advantage. Its average debt duration is much longer than the Greeks so other things being equal the UK has to refinance less frequently than the Greeks. But other things are not equal. The volume of UK issuance needed over the next few years however is huge. To put things in everyday terms a 250 bp spread increases the cost of a £100k mortgage by over £200 per month.

The pressure on Greek society is becoming evident in strikes, riots and assaults on public figures. This behaviour is starting to spread to Italy and Spain. Can it happen in the UK. Well cast your mind back to the miners strikes against the Heath and Thatcher government. True the power of the unions is much diminished but as the BA strike vote shows it has not gone away. Worse, we now have a much less homogeneous society with Islam and immigrants taking jobs from the indigenous population real flash points especially given the increasing likelihood of an ignominious retreat from Afghanistan with significant UK casualties.

Then we have the EU dimension with increasing bank regulation and the flight of financial institutions from London helped by Darling Brown's crazy tax policies.

Not a happy prospect but it is in the bond market that the crack will come. Increasing yields will have to be offered to sell UK gilts internationally. Swap rates will rise as will mortgage fixes set of swaps. Unemployment will stay high. If the Tories win in May they will meet a ferocious response from the Unions that have been quiescent under LabCon but have built up a huge head of resentment and what better target than a government of Toffs and former members of the Buller.

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