Anarchy in the UK (and US, Too)?

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The United
Kingdom is careening toward a possible currency and credit crisis
that would make the world’s investors even more leery of the United
States.

It’s one thing
when it’s Greece or Portugal. A credit downgrade or warning for
those countries isn’t exactly headline news for most investors.
For most of our portfolios, these are peripheral markets.

Ireland in
trouble, too? Yawn. Don’t own any Irish stocks.

Italy? What’s
new? Italy’s always running a deficit.

Spain? That’s
a surprise. Time to check the portfolio. But, whew, don’t own any
Spanish stocks.

The United
Kingdom? Whoa. Now we’re getting serious. How could the home of
Big Ben, Queen Elizabeth II, the Bank of England, the pound sterling
and clotted cream be facing a credit downgrade? Or maybe even worse?

The cost of
insuring against a U.K. default in the derivatives market is only
slightly lower than the price of insuring against a default by Portugal.

I don’t think
the United Kingdom is headed toward a default on its debt. But it
is in the midst of a crisis that could reopen wounds in a global
financial system that is still healing from the last crisis.

And it’s not
even on the radar screen for most U.S.-based individual investors.
I’d put a currency and credit crisis in the United Kingdom at the
top of my list for huge, potentially market-shaking – and unexpected
– events in 2010. (For more on the most expected but still potentially
market-shaking financial crisis of 2010 – that is Japan – see
my post titled "Japan’s
huge budget gamble will push up global interest rates
.")

Well, put the
U.K. on your radar screen now. That fast-moving blip is one that
you need to be tracking. A financial crisis in the United Kingdom
would be bad enough on its own, but I’m 100% certain that the moment
a crisis gets down-and-dirty nasty in London – and it’s certainly
headed that way – investors around the world will start asking:
If it can happen in the United Kingdom, why not in the United States?

Fail, Britannia?

Here’s the
problem: The financial and economic collapse in the United Kingdom
was even worse than in the United States. And the country, despite
huge bailouts and stimulus spending, looks like it will be the last
developed economy to return to economic growth.

Without growth,
only scorched-earth budget cuts can bring the United Kingdom’s deficit
under control – even within five years. And with an election looming,
neither the government nor the opposition is laying out a budget-cutting
plan capable of convincing global financial markets that the country
is committed to a solution.

That has sent
the pound sterling plunging, interest rates on government debt climbing
and investors fleeing U.K. assets. The country is edging toward
the point where the financial markets take control of the crisis
out of the hands of the government.

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the rest of the article

January
12, 2010

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