The Great Debate UK

UK chancellor has mixed message for gilt investors

– Ian Campbell is a Reuters Breakingviews columnist. The opinions expressed are his own –

The UK sounds Greek again. Britain’s new government is finding skeletons in the fiscal cupboard. George Osborne, the incoming chancellor of the exchequer, is appointing an independent watchdog to check the numbers out. The gilt market perhaps ought to recoil at the revelation that things are even worse than thought. But it’s more likely to look on the bright side: coalition honeymoon, transparency and rectitude to come.
UK government bonds will for now probably continue defying threats that kill in the Aegean. A record peacetime deficit, an inflation rate of 3.4 percent, a plunging pound: no matter, UK 10-year paper has risen in value by about 2 percent this year and yields a miserly 3.8 percent. But while Osborne’s deficit-cutting commitment will reassure, the medium-term risks to gilts remain great.
Gilts’ appeal is largely relative. UK debt levels have worsened appallingly — but are not yet appalling. Britain, like the United States, is rightly judged to have a more adaptable economy than the euro zone’s. The pound can weaken, helping competitiveness and growth and therefore favouring rebalancing of the government’s accounts.
But the growth that can save is not strongly in evidence now. Mervyn King, the Bank of England governor, has warned of possible growth disappointment as fiscal cuts kick in. Ironically this is another factor supporting gilts. Inflation is up, but is expected to be dragged down by economic weakness. That means interest rates will probably remain low, favouring bonds.
Still, gilts investors cannot be complacent. The fiscal deficit is huge but money-printing — quantitative easing — exceeded it in the year to March. Spencer Dale, the BoE’s chief economist, speculated last week that QE had taken about one percentage point off gilt yields. Unless the economy worsens, the BoE is unlikely to resume gilt purchases. And one day it must start selling its gilt mountain.
There are other big risks. The coalition honeymooners may fall out. The economic turnaround will be extremely hard to generate. And Osborne’s fiscal surgery may half kill the patient. For a UK that has much to do to stop its debt spiralling, gilt returns look poor. But the remarkable bonds may smile through the honeymoon all the same.

UK’s green agenda needs selling to investors

– Alexander Smith is a Reuters Breakingviews columnist. The opinions expressed are his own –

Britain’s new coalition government wants to cut the country’s carbon footprint as well as its colossal deficit. But the alliance’s more ambitious green policies sound expensive — especially for an administration whose priority is fiscal discipline. Private sector involvement will be critical. And investors may take some convincing.

New UK coalition deserves 7 out of 10

– Hugo Dixon is a Reuters Breakingviews columnist. The opinions expressed are his own –

The new UK coalition deserves 7 out of 10. The pact between the Conservative and Liberal Democrat parties, led by David Cameron as the new prime minister, seems determined to address the country’s most important problem — the deficit. This is vital given that the euro zone debt crisis could still prove contagious. It should also be positive for sterling.

Gordon Brown: flawed saviour of financial system

– Hugo Dixon is a Reuters Breakingviews columnist. The opinions expressed are his own –

Gordon Brown may go down in history as the flawed saviour of the global financial system. Brown had many faults including overseeing a public spending splurge in his decade as the nation’s finance minister. But he did make one big contribution. He galvanised other leaders to save the bank system during the post-Lehman <LEHMQ.PK> meltdown.

Eerie calm before Britain’s election

– James Saft is a Reuters columnist. The opinions expressed are his own –

To look at sterling and gilts, you would hardly know that Britain is sailing into a general election which will likely deliver a weaker government with a diminished ability, if not will, to grapple with high debts, an uncertain role in the global economy and an aging population.

Breaking up banks is no silver bullet

– Hugo Dixon is a Reuters Breakingviews columnist. The opinions expressed are his own –

Breaking up the banks is no silver bullet. Politicians on both sides of the Atlantic — including two of the party leaders fighting the UK election — want to separate so-called casino investment banks from utility lenders. But such simple rules would create arbitrage opportunities and rigidities without curbing excess risk-taking.

Weak UK recovery argues for consensus on cuts

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– Ian campbellCampbell is a Reuters Breakingviews columnist. The opinions expressed are his own –

A first estimate of UK first-quarter growth is a chilly 0.2 percent.¬† Failure of government policy, the opposition will say. Shows the folly of proposed Conservative spending cuts and tax increases, Gordon Brown, the prime minister, will claim. But a colder financial look will see that enormous stimulus has so far produced the weakest of recoveries. Whatever the election outcome, the UK’s leaders are going to have to be grown-ups. In this emergency, cooperation – or coalition – is required.

Inflation impoverishes Britons the easy way

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– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
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Critics might say the UK’s inflation target is just for fun. Consumer prices were 3.4 percent higher in March than in the previous year, well above the 2 percent target rate, but the Bank of England will do nothing at all.

If the central bank were serious, shouldn’t it raise interest rates and crush every bit of life out of the UK economy? Not really. The UK has above target inflation because world oil prices are high, the pound is low and VAT is up. But it has inflation for poorer and richer.

Fears of UK hung parliament may be overstated

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– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

Fears of a huhugodixon-150x150ng parliament following the UK’s general election may be overstated. With Nick Clegg, leader of the Liberal Democrats, Britain’s third largest party, performing well in the first prime ministerial debate, sterling has received a mild knock. Investors do not like the uncertainty that goes with a hung parliament. While many European countries are used to coalition government, the UK is traditionally a two-party system – with government swinging between Labour and the Conservatives.

Crisis, what crisis?

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– The author is a Reuters Breakingviews columnist. The opinions expressed are his own. –

¬†Crisis, what crisis? That could be motto for the election manifestos published by Britain’s main political parties this week. Neither Labour nor the Conservatives addressed the country’s fiscal crisis head-on.

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