Protestor outside the Bank of England - PIMCO fears UK 'debt trap'
Posted on 03/31/2010 8:28:01 PM PDT by bruinbirdman
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.
Protestor outside the Bank of England - PIMCO fears UK 'debt trap'
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. Spreads on 10-year gilts have crept up to 14 basis points above those of Spain, itself in some difficulty.
Professor Carmen Reinhart, an expert on sovereign defaults at Maryland University and author of This Time is Different: Eight Centuries of Financial Folly, said Britain's trump card is a debt maturity of over fourteen years, much higher than the US or the big eurozone states. This greatly reduces roll-over risk or the danger of a "sudden death" crisis in the event of a shock.
"What we found in our research is that countries nearing default start to rely on ever shorter debt maturities and issue more bonds in foreign currencies. The UK has done neither," she said.
"Britain may need a scare to force the politicians to act, just like the Canadians in the early 1990s when they started to trade like an emerging market. The lesson in these cases
(Excerpt) Read more at telegraph.co.uk ...
Here comes the UK debt bomb...........KABOOM!!!!
And here is the US debt bomb.
Does this not sound like the US?
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