Tuesday, 5 January 2010

Gilt Pigeons coming home to roost & the Greeks have to swallow an EU Trojan horse.

In March 2009 I wrote about the coming crisis in selling UK government debt and the associated fall in Sterling.The bond market mill grinds slowly but it grinds exceeding fine. Today's DT Business runs with the front page headline, "Sell gilts,says biggest global bond house" The bond house is the US based Pimco and the head of its European Investment team is one Andrew Balls, brother of UK cabinet minister Ed Brown Balls. Obviously there may be some sibling rivalry involved.

Those areas of the bond market that have had greatest central bank support will be most vulnerable when QE ends opines one Mike Amey a London portfolio manager. In the UK this means Gilts and this means gilt prices will fall rapidly, gilt yields inversely correlated with price will rise, swap rates hedged into gilts will also rise and Joe Public's mortgage fixes set off swap rates will also rise quickly. The residential housing market will go South in a big way and their will be the usual weeping, wailing and gnashing of teeth.

Cheer up! I personally guarantee none of this will happen until after the May General Election. The BoE will do the government's bidding and keep QE in place until told to withdraw it by a new administration. Central bankers love their gongs, knighthoods and peerages, all in the gift of the prime minster and awarded for doing what you are told but withheld if you do the right thing for the country. Its a pity you cannot give peerages to the bond market! It has the nasty habit of not doing what politicians say especially if they have a bald eagle motif.

Our EU partners, the Greeks, of whom I have often written seem to have got themselves into an even worse mess than Darling Brown Balls. " Greece faces EU supervision as deficit soars" is today's other significant DT headline. The DT reveals, "Officials from the European Commission and the European Central Bank are on standby for a 'monitoring visit' to Athens once they receive word from the Greek authorities outlining how they intend to get a grip on public debt." Well you can't say it plainer than that. If the Greeks want bailed out by the EU they have to accept EU rule, otherwise no dosh. Last time the Greeks foisted the wooden horse on the Trojans but this time its the EU foisting its wooden rule on the Greeks.

Can the UK be far behind? There is little difference between the parlous state of our public finances and that of the Greeks. Rest assured Darling Brown Balls will not let this happen till after the election but also be assured the ensuing post election LibLabCon government will drag in the EU wooden horse just like the Greeks!

1 comment:

Michael Canton said...

The big difference between Greece and the UK is that they are stuck in the euro. A devalued pound is painful in many ways but it is infinitely better than being forced up to an artificially high level. There are only two ways for Greece, either they leave the euro or Germany bails them out yet again. For Germany it is like rolling a snowball up hill, it just keeps getting bigger and heavier and sooner or later something will have to give.