Monday, 8 March 2010

Well they would say that wouldn't they

The words of Ms Mandy Rice Davies at the the Profumo related trial of Stephen Ward are still true 50 years later. The head of the IMF, Dominique Strauus-Kahn, is quoted this morning re Greece, as saying 'There is no reason to believe that Spain and Portugal will also need to seek IMF assistance. Well as Ms Mandy noted he would say that. He can't say anything else without panicking the market. The same applies to the Corporal Jones, "Don't panic, don't panic" cries from the Bank of England's Mervyn King, Darling Brown and every other UK authority you can think of.

The truth is there is every reason to panic. The fiscal position of the UK is dire and the Forex and Bond markets are even now passing their rational judgement on the UK economy. Sterling has further to fall and consequently Gilt interest rates have further to rise. Who wants to buy gilts at 1.50 $/£ knowing it will soon be 1.40$/£?

I know from working in government that the first reaction of the authorities is to hush things up to avoid a panic by the general populace. Eggs might get broken particularly politicians eggs and they want to save their eggs first. So called panic reactions by the populace as a whole are generally rational reactions to authorities blunders. When Peston, the BBC's voice of Downing Street, broke the bad news about Northern Rock two years ago on a Sunday evening, the Monday morning queues at NRock branches of depositors wanting their money back was a very rational reaction - NRock was bust! It forced the authorities into taking the correct action ie guaranteeing all retail deposits in every UK bank! Unfortunately they had not done their job properly in relation to Icelandic banks taking UK deposits so they have a £3bn debt to try and extract from the truculent and uncooperative Icelanders.

Sarkozy pledged over the weekend that Europe would stand behind Greece, 'if necessary' but ruled out any immediate financial backing. Sarkozy is not prepared to put his money where his mouth is but then words are cheap and money is err... expensive. The Greek government has announced 3 packages of austerity measures designed to placate the EU and the IMF. These are all in accord with Ms Mandy's dictum. But as anyone who has lived in Gordon's UK knows only too well announcements are one thing, even re-announcements, but implementation is the difficult part.

The Greek public sector unions will continue to strike, burn EU flags etc. The Greek self employed will hide their funds from the tax man. The wealthy Greeks will be getting their money into safe havens like Switzerland. The Greek politicos, not Sarkozy, Merkel, Barroso etc will be the ones taking the abuse and violence and eventually, yes they will panic. Panic is a Greek word derived from the god Pan and has a 3000 year history in Greece. Out of their panic might just come the correct policy, leave the Euro and devalue the drachma.

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