A Ticking Sound In The UK

From Bloomberg:
Greece Now, U.K. Next as Scots Ready for Pound Plunge

Moody’s Investors Service said in December the U.K. may “test the Aaa boundaries.”

From Bloomberg:
Sell Pound Versus Rand on U.K. Deficit Woes, Standard Bank Says

By Garth Theunissen

March 2 (Bloomberg) -- Investors should sell the pound versus the rand as the U.K.’s budget deficit exceeds that of South Africa’s while its interest rates remain lower, boosting the rand’s yield advantage, says Standard Bank Group Ltd.

“We believe the concerns surrounding the U.K.’s budget deficit will intensify over the coming months,” Michael Keenan, a Johannesburg-based currency strategist at Standard Bank, wrote in a client note dated today. “South Africa’s fiscal position” is “healthier than that of the U.K.”

Prime Minister Gordon Brown’s government, which faces an election this year, is selling a record amount of debt after economic stimulus measures and declining tax revenue swelled the budget deficit to more than 12 percent of gross domestic product. By contrast, South Africa’s budget deficit is expected to fall to 6.2 percent of GDP in the year through March 2011, from 7.3 percent in the previous fiscal year.

The South African Reserve Bank’s 7 percent benchmark interest rate also exceeds the U.K.’s 0.5 percent rate, making the rand a more attractive carry-trade purchase. In carry trades, investors borrow money in countries with low interest rates and invest the money in markets that offer higher returns.

“The rand enjoys a positive interest-rate differential over the U.K., which implies a positive carry when embarking on a short pound-rand position,” Keenan wrote. A “short” is a bet a currency will weaken while a “long” is a wager on appreciation.


It appears that debt issues and a currency crisis will soon be evident in the UK.

A number of factors seem to be aligning presently:

  • There is a strong possibility of a minority government aka "hung parliament"
  • The government plans to peddle over 200 billion pounds of gilts this year
  • Foreign buyers of gilts are few
  • There is general resistance to fiscal austerity
  • The UK has very large debt load at nearly 100% of GDP
  • The economy is highly service based accounting for approx 30% of GDP
  • Tax receipts are dropping quickly as the labour force has moved to flex time instead of layoffs.
  • The central bank has attempted QE on steroids to try to reflate the economy
  • Political strong arm tactics may force the countries weak banks to buy gilts thereby reducing much needed cash resulting in a reduction of business and consumer lending. (This is highly deflationary)
  • Credit rating agencies have given warnings about the potential loss of AAA status but may hold off until after the election to finalize their decision.
  • A substantial drop in the value of the pound sterling seems imminent.  20% is likely, 30% or more is possible.
  • A bond auction failure is likely within the year, and possibly within 6 months
  • If a currency crisis induced by a bond market collapse occurs, we could see the pound reach parity with the US dollar.  For the citizens of the UK, this would make imports much more expensive.
If I was a resident of the UK, I would be shifting from pound sterling into gold - the monetary metal that is not subject to reckless debasing.