Britain and the PIGS

[bruinbirdman]

As of today, the British government must pay a higher interest rate to borrow money for ten years than either the Italian or the Spanish governments, despite the extraordinary ructions going on within the eurozone.

The yields on 10-year British Gilts have risen to 4.06pc, compared to 4.05pc and 4.01pc for Spain. So if international bond markets are turning wary of Club Med sovereign bonds, they seem even more distrustful of British bonds.

Eurosceptics should resist any Schadenfreude over the unfolding EMU drama in Greece. (Not to mention the huge exposure of British banks to Club Med). The Greek crisis is a dress rehearsal for attacks on any sovereign state with public accounts in disarray.

While Britain went in to this crisis with a much lower public debt than Greece or Italy (though higher total debt than either), it now has the highest budget deficit in the OECD rich club — and perhaps the world — at 13pc of GDP.

I have a very nasty feeling that markets are about to pounce on Britain. All they are waiting for is a trigger, perhaps a poll prediction of a hung-Parliament or further hints that Tories dare not confront the beneficiaries of state spending.

Of course, bond yields do not tell the whole story. Credit Default Swaps (CDS) measuring bankruptcy risk are much lower for the UK than for Greece or Spain.

Bond yields capture the risk of devaluation and inflation, where CDS measure pure default risk (or do in theory — though they are also speculative tools). Britain may engage in stealth default by monetizing debt and inflating, but that does not count for CDS contracts. Countries in a fixed exchange system with loans in somebody else’s currency — the Gold Standard in the 1930s, EMU today —

[hennie pennie]

*ping*

[jakerobins]

Time for the EU to end. Britian is getting a bum deal and should run not walk away...............

[FromLori]

If krugman has anything to say about it we will have hyper inflation (though with current levels of spending we probably will anyway)

http://www.economicpolicyjournal.com/2010/02/krugman-fight-stagflation-with-hyper.html

[VA Voter]

It’s amazing how Mr. Market can look at Club Med and leave the US equities basically intact. The possibility of a Greek bailout bumped equities last week. If a Greek bailout happens it will be a 2-3 day retrenchment and then a continued market errosion will occur.

The next crisis dominoes will be the rest of the PIIGS, UK, China, the US carry trade and the US itself, and not necessarily in that order.

The US is not immune to market force corrections for profligate deficits and excess debt.

The plunge will be fast and furious.

The world will be dumped into a dark depression. The only good news is that our mortal enemies will either lead or be swept along. Major wars are not out of the question.

I think the US will ultimately emerge in the best shape because it will fall back on free market systems long before any of the other countries.