Morgan Stanley Fears UK Default in 2010

As you may recall we are bears on sterling, and view the UK as the Iceland of the G20.

The monetary policies of the Bank of England were as bad as those of the Greenspan - Bernanke Fed. The difference is that the UK does not hold the world's reserve currency as a captive source of revenues.

As an aside, we see that Bank of England advisor and economic franc-tireur Willem Buiter has decided to seek greener pastures as chief economist with Citi in the States. Timely exit. Bravo, Willem.

It is sad to see a great people brought low by irresponsible leadership and economic recklessness. Perhaps there will be a movement to bring in a reform government. Hint, ask for details first, as the Yanks are finding out to their dismay as they experience continuity they can hardly believe.

UK Telegraph
Morgan Stanley fears UK sovereign debt crisis in 2010
By Ambrose Evans-Pritchard
4:09PM GMT 30 Nov 2009

Britain risks becoming the first country in the G10 bloc of major economies to risk capital flight and a full-blown debt crisis over coming months, according to a client note by Morgan Stanley.

The US investment bank said there is a danger Britain’s toxic mix of problems will come to a head as soon as next year, triggered by fears that Westminster may prove unable to restore fiscal credibility.

“Growing fears over a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK's AAA status,” said the report, written by the bank’s European investment team of Ronan Carr, Teun Draaisma, and Graham Secker.

In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” they said.

Morgan Stanley said that such a chain of events could drive up yields on 10-year UK gilts by 150 basis points. This would raise borrowing costs to well over 5pc - the sort of level now confronting Greece, and far higher than costs for Italy, Mexico, or Brazil.

High-grade debt from companies such as BP, GSK, or Tesco might command a lower risk premium than UK sovereign debt, once an unthinkable state of affairs.

A spike in bond yields would greatly complicate the task of funding Britain’s budget deficit, expected to be the worst of the OECD group next year at 13.3pc of GDP.

Investors have been fretting privately for some time that the Bank might have to raise rates before it is ready -- risking a double-dip recession, and an incipient compound-debt spiral – but this the first time a major global investment house has issued such a stark warning.

No G10 country has seen its ability to provide emergency stimulus seriously constrained by outside forces since the credit crisis began. It is unclear how markets would respond if they began to question the efficacy of state power.

Morgan Stanley said sterling may fall a further 10pc in trade-weighted terms. This would complete the steepest slide in the pound since the industrial revolution, exceeding the 30pc drop from peak to trough after Britain was driven off the Gold Standard in cataclysmic circumstances in 1931.

UK equities would perform reasonably well. Some 65pc of earnings from FTSE companies come from overseas, so they would enjoy a currency windfall gain.

While the report – “Tougher Times in 2010” – is not linked to the Dubai debacle, it is a reminder that countries merely bought time during the crisis by resorting to fiscal stimulus and shunting private losses onto public books. The rescues – though necessary – have not resolved the underlying debt problem. They have storied up a second set of difficulties by degrading sovereign debt across much of the world...

Whistleblower: Gordon Brown is Culpable and Should Resign

The UK would do well to force Gordon Brown to resign, and for a new government to be created. Who would take his place? Surely no one among the Tories, as they planted the seeds for this debacle and remain unreformed and unrepentant.

In the US, we have done something emulating this already, using our process of regularly scheduled elections and the repudiation of the Republican party principles (or lack thereof).

However, it remains most unsatisfying and discouraging that Obama continues to put pressure on the Congress to 'just move on' and not investigate any of the abuses of the past eight years, and points of Constitutional excess that led us to this point, or engage in meaningful investigation and reform of the monied interests who are such heavy contributors to the Democratic party.

He looks less like the Lincolnesque figure his admirers assume him to be, and more like a small time dealmaker from the Chicago machine.

He can do better than this. And we the voting public deserve better. Obama needs to grow a principled backbone worthy of his words.

UK Independent
Blame Brown: Revenge of the whistleblower
By Margareta Pagano and Jane Merrick
February 15, 2009

A former HBOS executive says he has documents that prove the Prime Minister must take responsibility for the mess in the markets

The HBOS whistleblower whose revelations led to the resignation of one of the Government's top regulators is about to release a tranche of documents which he says point a direct and accusatory finger at Gordon Brown's responsibility for the banking crisis, and has called on the Prime Minister to resign. In a further blow to Labour, an Independent on Sunday poll showed voter support for the party evaporating, leaving it only a few points ahead of the Lib Dems.

Paul Moore, the former head of risk at HBOS, told the IoS that he has more than 30 potentially incendiary documents which he will send to MPs on the Treasury Select Committee. He says they disprove Mr Brown's claim about the reasons for HBOS's catastrophic losses – now estimated to be nearly £11bn – and show that it was the reckless lending culture, easy credit and failed regulation of the Brown years that led directly to the implosion of British banks.

After Mr Moore's explosive testimony at the MPs' banking hearing, the Prime Minister had denied the former executive's central charges and said that HBOS's difficulties were due to its flawed business model. Mr Moore says his documents refute this and prove the cause of the crisis can be laid at Gordon Brown's feet. He believes Mr Brown's failure to intervene over the reckless lending undertaken by all the banks over the past decade means he should go. "The failure goes right to the heart of the system – to the internal supervisory system and right to the top of government."

Mr Moore told the IoS yesterday: "Brown must go. He cannot remain in office. He has presided over the biggest boom in the history of the country as well as one of the biggest busts. But he promised no more boom and bust. He must be held accountable for his failure to oversee the stability of the country.

(Obama's blocking of congressional investigations of the abuses of prior administration is a kind of professional courtesy among politicians that is not warranted nor serving of the public interest, only of the concept of a class of ruling elite. And his appointment of Larry Summers and other appointments that fail the integrity test is a disgrace. - Jesse)

"Brown presided over a policy based on excessive consumer spending based on excessive consumer credit based on massively increasing property prices, which were caused by excessively easy credit which could only ultimately lead to disaster. But no, in Gordon's mind it was all caused by global events beyond his and anyone else's control...."

(Gordon Brown pales by comparison to the enormity of Alan Greenspan's serial malfeasance and advocacy for ruinous policy errors. - Jesse)

He says the papers – which he has kept from his time in his post as head of risk, from 2002 to 2005 – show that HBOS was involved in a huge sales drive to win market share which ultimately led to its collapse. Mr Moore claims that the "driven sales culture" was led by Sir James, and this, plus the "staggering failure" of the Government to manage the economy, had forced him to speak out. "Brown swaggers around holding himself out as the economic saviour of the world with a level of hubris that defies belief. But does he ever acknowledge that it was he, as Chancellor of the Exchequer, who presided functionally over the economic strategy that got us into this mess in the first place?"

As a trained barrister, Mr Moore stressed that his new evidence being sent to the committee will back up his claims. "I have compiled a meticulous record of my time at the bank. This will show that the version of events given by KPMG, which was brought in to carry out an audit of my claims, is inaccurate," he said. "Key witnesses were not included in the original audit and there are many factual errors. I will only be vindicated when all my allegations are proved by the evidence I have....."

United Kingdom and the British Pound Are in Serious Trouble

The United Kingdom has been in trouble for some time, and a great deal of it is due to the actions of self-serving financiers and elites which are leading the much photographed general populace into debt peonage, a modern day form of serfdom.

There are several ways out of this dilemma, if the Brits have the political will, but it will not be easy as they do not have the world's reserve currency at their disposal. Gordon Brown is not the type of leader that they will require, as he is inherently part of the problem.

It is an interesting speculation to consider that the bravehearts of Scotland may choose once again to go their own way, and to repair the carnage caused them by the Royal Bank of Scotland among others.

(Postscript: It is not clear that the UK GDP situation is all that dissimilar from the US situation based on the numbers, and we will know more about this at the end of the upcoming week when the US reports 4Q GDP. The point of this essay is that the UK is in a poorer position to deal with the problem and this blogger tends to agree, for some slightly different reasons.)


UK Telegraph
Britain on the brink of an economic depression, say experts
By Edmund Conway, Economics Editor
8:22AM GMT 24 Jan 2009

Britain is heading for economic depression for the first time since the 1930s, economists have warned.

Families must brace themselves for a slump of far greater severity and longevity than the recessions of the 1980s and 1990s, they warned. They said the current crisis will be of a scale to rival the biggest peace-time crisis in modern history — the Great Depression.

The warning was delivered by economists and politicians after the Office for National Statistics revealed that the economy shrank by 1.5 per cent in the final three months of 2008 alone.

The contraction follows a 0.6 per cent fall in gross domestic product (GDP) — the most comprehensive measure of Britain’s wealth generation — during the previous three months. This means Britain fulfils the criteria for a technical recession — two successive quarters of negative output.

The news sent the pound sliding to its lowest level since 1985. Sterling dropped more than three quarters of a cent to $1.3688 as investors speculated that the Bank of England may be forced to cut interest rates towards zero in response to the recession.

John McFall, the Labour chairman of the Treasury select committee, sounded a more optimistic note. He said: "We know that 2009 is going to be really tough for many people. There is a determination in Britain and across Europe to keep people in work, to avoid unemployment, so people’s contribution will not be lost."

Confirmation that the economy has entered recession capped a week in which Gordon Brown was forced to announce a new £350 billion bank rescue plan. Unemployment has almost reached two million. President Barack Obama discussed the financial crisis with the Prime Minister on the telephone yesterday, his first call to a European leader.

The fall in GDP is the sharpest since 1980, when Britain was mired in its most severe post-war recession. The news is an embarrassment for Mr Brown, who pledged as Chancellor not to return Britain to "boom and bust".

Britain is likely to suffer more than other economies due to its heavy reliance on the financial services sector, which has all but imploded in the wake of the economic crisis, experts said.

Others raised the spectre of an outright economic depression, often defined by experts as a peak-to-trough economic contraction of 10 per cent. Aside from the demobilisation periods following the First and Second World Wars, this kind of contraction has never taken place — not even in the 1930s’ Great Depression.

Roger Bootle, the managing director of Capital Economics, said: "I think there’s a very good chance this recession will be the worst since the 1930s. I suspect the economy could shrink by 6 per cent from last year to the end of next year — and that might not be the end.

The plight facing Britain is uncannily similar to the 1930s, since prices of many assets —from shares to house prices — are falling at record rates, but the value of the debt against which they are held remains unchanged.

This “debt deflation” is among the most painful of all economic phenomena, since it means the amount families owe increases each year even if they borrow no more.

Albert Edwards, a strategist at Société Générale, likened the British economy to a Ponzi scheme — a fraudulent debt mountain like that allegedly used by the New York hedge fund manager Bernard Madoff.

“What I find amazing is that people aren’t really nailing Gordon Brown and [Bank of England Governor] Mervyn King for this,” he said. “At least in the US they had the excuse of the arrival of sub-prime — a new sector of the market. We didn’t really have anything similar but we ended up with a bigger national Ponzi scheme than the US.”