Britain and the PIGS

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by Ambrose Evans-Pritchard: Fears
of ‘Lehman-Style’ Tsunami as Crisis Hits Spain and Portugal



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.

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 – can indeed

current account deficit is down to 1.4pc of GDP, much better than
Club Med.

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19, 2010

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