Tag Archives: gordon brown

PIMCO Fears UK ‘Debt Trap’

2 Apr

From the UK’s Telegraph:

The US bond fund PIMCO has warned that Britain risks a vicious circle of rising debt costs as global investors demand a penalty fee on gilts to protect against inflation.

Bill Gross, the fund’s chief and emminence grise of bond vigilantes, said the UK was on its list of “must avoid” countries along with Greece and others in eurozone’s Club Med.

The flood of British debt is likely to “lead to inflationary conditions and a depreciating currency”, lowering the return on bonds. “If that view becomes consensus, then at some point the UK may fail to attain escape velocity from its debt trap,” he wrote in his April monthly note.

Mr Gross said the UK is not yet in crisis but gilts are sitting on a “bed of nitroglycerine” and must be handled delicately.

Michael Saunders from Citigroup said the UK has “no credible medium-term path back to fiscal sustainability”.

UPDATE:

From Reuters –

PIMCO Sees UK Downgrade

PIMCO sees Europe’s action on Greece as ineffective in fixing the country’s problems, while Britain’s sovereign debt rating could be downgraded within a year, a top executive of the world’s largest bond fund said.

Scott Mather, head of global portfolio management at Pacific Investment Management Co (PIMCO), told a briefing in Taipei on Thursday that the company was underweighting UK, U.S. and pan-European 10-year sovereign bonds.

“Miracles are needed in the next six months in order to keep economic growth in the developed world,” Mather said.

Last month, PIMCO said it was maintaining its negative stance on British gilts because the amount of debt the country would have to issue in the future should lead to inflation and a depreciating currency.

The country’s record-high debt has caused disquiet among investors, and Standard & Poor’s has put the country’s top-notch triple-A rating on a negative watch.

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Britain Grapples With Debt of Greek Proportions

5 Mar

From the New York Times:

Suddenly, investors are asking if Britain may soon face its own sovereign debt crisis if the government fails to slash its growing budget deficits quickly enough to escape the contagious fears of financial markets.

“If you really want a fiscal problem, look at the U.K.,” said Mark Schofield, a fixed-income strategist at Citigroup. “In Europe, the average deficit is about 6 percent of G.D.P. and in the U.K. it’s 12 percent. It is only just beginning.”

Since the Labour government’s intense fiscal intervention in 2008 and 2009, yields on British government debt have soared to among the highest in Europe. And on a broader scale, which includes the borrowing of households and companies, the overall level of debt in Britain is the second-largest in the world, after Japan’s, at 380 percent of the country’s gross domestic product, according to a recent report by the consulting company McKinsey.

Britain is not in the 16-nation euro zone and, unlike Greece and other struggling countries that use the currency, it retains control over its monetary policy. As a result, it has benefited so far from a huge bond-buying program undertaken by the Bank of England — proportionally, the largest in the world — that has kept mortgage rates and gilt yields at unusually low levels.

That means the government and its citizens have been able to continue to borrow at interest rates that do not reflect their true financial situation.

Indeed, the increase in private and government debt here contrasts sharply with the deleveraging that has been going on in the United States.

British household debt is now 170 percent of overall annual income, compared with 130 percent in the United States. In an echo of the United States’ rush into subprime mortgages with low teaser rates, millions of homeowners in Britain have piled into variable-rate mortgages that are linked to the rock-bottom base rate.

As for the British government, it has been able to finance a budget deficit of 12.5 percent of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.

Sound familiar?

In Australia, household debt is over 150 per cent of income. And in an echo of the British rush into US-style sub-prime mortgages with low teaser rates, some 250,000 homeowners in Australia have piled into variable-rate mortgages that are linked to the rock-bottom base rate, until recently the lowest in 50 years. Many highly ‘marginal’ borrowers who could not previously even raise a deposit, were lured into mortgage debt by the Rudd Government’s First Home Owners Boost, plus additional state-based grants.

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