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Bankrupting Britain's AAA Credit Rating at Risk

Interest-Rates / UK Debt Dec 08, 2009 - 07:07 PM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThe credit ratings agency Moody's in late as usual move woke up to the fact that Britain's public sector net debt looks set to mushroom to more than 100% of GDP and therefore threatens Britain's AAA credit rating status, which currently stands at AAA "resilient" below that of AAA "resistant" as enjoyed by the likes of Germany and France. Especially as Britain lags virtually all other major economies in terms of economic recovery.


The news form the ratings agencies is bad news for Alistair Darling ahead of tomorrows pre-budget report where he will have to deal with the twin forces of fuelling an economic bounce into a general election as well as attempting to put in measures to narrow the £200 billion budget deficit gap that threatens the bankruptcy of the country and which my continuing analysis on the inflation mega-trend confirms is basically impossible to bridge therefore destined to spark a decade of stagflation.

The impact of a credit ratings downtrend was immediately felt in the markets as both Sterling and UK Gilts fell. The risk is that the out of control budget deficit (which is where we are at) and exploding liabilities would lead to investors dumping UK bonds unwilling to finance the deficit which would set the scene of even more Quantitative Easing aka Money Printing to monetize debt (buy government bonds) which would feed the Inflationary debt spiral as the currency continues its downward spiral.

Out of Control Debt and Liabilities

The below graph illustrates the updated Government projection for the annual Public Sector Net annual deficit against Alistair Darlings November 08 and April 09 targets, as well as my original estimate of November 2008 (Bankrupt Britain Trending Towards Hyper-Inflation? ) that remain unchanged.

The target PSND of £1,300 trillion would approximately equate to 100% of GDP by 2013/14. This is against my original target as of November 2008 of £1.48 trillion by the end of 2003/14 at a projected 114% of GDP.

Therefore there is nothing announced in the governments targets nor any change in economic circumstances that warrants amending the total liabilities target of £4.75 trillion by the end of 2013/14, which confirms that Britain remains firmly on the path of a probable decade of economic stagnation coupled with high inflation i.e. stagflation.

However the problem for Britain is that whilst the British economy stagnates, many of the other world economies will not stagnate but grow thus forcing up the price of commodities, goods and services and hence result in higher inflationary pressures. Which therefore implies that the budget deficit will be widen further as public spending will need to be higher in an attempt to counter loss of purchasing power of the currency. A higher budget deficit would require higher interest rates and therefore more monetization of government debt which confirms the vicious inflationary debt spiral cycle. The only true answer to escape this viscous inflationary cycle is to get a firm grip on the budget deficit in the immediate future, the longer we leave the debt to grow the more difficult it will become to deal with.

The Government setting a target of halving the budget deficit over the next 4 years is not going save the economy from stagflation as by the end of this period Britain will still owe far more than it does today so actually be in a far worse budgetary and probable economic state in real-terms.

For more on my inflationary mega-trend ensure your subscribed to my always free newsletter, especially as I converge towards including major forecasts for all key markets for 2010. I.e. what will become of the stocks stealth bull market that has soared during 2009 ? What about the debt fuelled UK housing market and economic bounce.

Source: http://www.marketoracle.co.uk/Article15661.html

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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