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.
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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.
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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.")
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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?
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.
January 12, 2010