The Great Debate UK
Portuguese 10-year government bond yields have hovered stubbornly above 7 percent since the Irish bailout announcement, hitting a euro-lifetime high and giving ammunition to those who say Lisbon will be forced into a bailout.
And of those who hold that view, it’s clear that bank economists have been most vocal in expecting Ireland and Portugal to seek outside help.
Take last week’s poll in which economists said Portugal would follow Ireland in applying for EU funds. Bank-based economists who expected a Portuguese bailout outnumbered those who didn’t almost three-to-one. For non-bank economists – those working at research houses, brokers and wealth management firms – the margin was only two-to-one.
– 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.
It just won't go away, this needling worry about the U.S. dollar losing its coveted top-dog status.
No matter that there are plenty of reasonable arguments to support the dollar as the world reserve currency -- namely there's just no alternative -- for perhaps decades to come.
Has London's residential property market bottomed out?
This question has a particular resonance for my husband and me. We are in the middle of selling our London flat. So, unless we buy again immediately, we will be short London property.
Over the longer term, British, and especially London, residential property has been a spectacular investment. We can thank strict planning laws, tax advantages to home ownership and the wealth of the City.
Investors like simple narratives, which is why markets swing erratically and illogically between extremes of hope and fear. Reality is more complex. As F. Scott Fitzgerald remarked “the true test of a first-rate mind is the ability to hold two contradictory ideas at the same time”.