Uk Finances And Will The Uk Default On Its Sovereign Debt?
Greece is under considerable pressure given that it is not able to finance its debt at normal market levels
.
Greek bonds have been downgraded to Junk status. There is now a fear that contagion will sweep across Europe as Portugal and Spain have also had their credit ratings downgraded. If the problems continue it may not take long to affect the UK.
The
financial markets have already had their feathers ruffled by a recent International Monetary Fund (IMF) proposal to not just tax banks, but the entire financial sector. This is a bold move by the IMF in that at least it is clear who is being targeted. It is not just the banks this time, it is everyone.
Many firms across the financial sector will be scratching their heads trying to understand why such a punitive tax can possibly be of any benefit at a time when most economies around the world are on their knees.
To take out 2-4% of GDP in tax will send many countries spiralling back into recession, not least the UK due to the size of its financial sector.
The additional cost of borrowing will also affect lending adversely. Whilst the IMF does not aim to prevent the way banks behave, it will hugely change the way they lend to the detriment of the availability of credit.
The answer is not the need for more regulation and higher taxes, which will cut off the hands that feeds the wider economy. The answer is to reform the regulatory environment that currently exists and clearly has not worked.
Rather unsurprisingly the UKs recent public finance data has shown its fiscal situation continuing to deteriorate. Note that the numbers might be a little distorted by the seasonal factor of the usual public sector rush to get spending done for the end of the financial year. Nevertheless the situation is not getting any better.
As Simon Denham of
CapitalSpreads commented recently, It is no wonder the Conservative party claim that the UK might have to go to the IMF for emergency funding. Although I am sceptical of such a necessity even in the event of a hung parliament.
That might be true but the UKs financial situation is not great. Looking at the UK in more detail, Retail Sales data has been coming in a little lower than expected and, although sales have risen, the market was expecting a little more impetus from the improved weather. Elsewhere employment data continues to be poor.
The UK may not default, and Greek Debt problems may not spread across Europe, but investors should factor these potential problems into their decision making.
by: Robert Thomas
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