Wednesday, 24 August 2011

Double Dipper

Here's a thing. Amid all the fear of exposure to rotten sovereign debt, particularly Italian, by our banks, our UK Government has just issued a latest set of Government Bonds at a paltry rate of return of just 2.4% over the life of a 10 year Bond.

What does that say about the UK Sovereign Debt situation and our ability to pay, considering both the US and Japanese credit ratings have been downgraded recently? Is this a huge confidence boost to us all?

Not as such. It's more of a comment about the confidence in the performance of our equity market. It's also slightly skewed in that the biggest purchaser of our own debt in recent months has been the Bank of England via Quantitative Easing, or the printing of more money (i.e. bought with zero actual funds to back the money). And these Bonds are popular so it says that our own pensions and insurance companies actually prefer to take a low risk 2.4% to help grow our pensions than back the equity market - for a considerable period of time. Wow!

It argues strongly that our economies are by no means out of the woods yet and that these fund managers are expecting another dip. Not far wrong as we saw the German economy significantly stall just recently and they are the ones mooted to back the failing economies within the Eurozone.

It doesn't feel too good right know. If confidence in equities and economies are really that low to make 2.4% over 10 years attractive earnings then we are not in a good place.

The Eurozone and Sovereign Debt worries are also pretty grim. Angela Merkel has effectively scrubbed the idea of Eurobonds to guarantee the whole of the Eurozone debt yet if you add all the budget deficits of all the countries in the Eurozone together then the overall position of debt versus GDP is substantially better than that of the US. It argues strongly that the conept of the Eurobond is a good idea in that context.

But Germany doesn't want to be the last person standing and why should all other countries have the same inerest rates as Germany on their borrowing effectively, so negating Germany's competitive edge?

There are some brain-numbingly odd things going on. But the one thing we can be sure of is that we are in the middle of another financial crisis and there will be a lot of focus on the meeting of Central Bankers in Jackson Hole this week to see how on earth do we get out of this one.

- Posted using BlogPress from my iPad

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