Asking whether bankruptcy is on the cards for a sovereign nation may seem a little extreme, but the economic portents are not good for the UK.
Without getting too political, the British public has listened to Gordon Brown explain time and again how amazing he is with the economy. If you are from the UK, you can join in with his catchphrases as well…
“An end to boom and bust”
“Longest serving Chancellor”
“Borrowing only what can be repaid through the economic cycle”
“The Golden Rule”
Do I need to go on?
And yet here we are, in deep doo-doo. Since becoming Prime Minister, it has been universally accepted that Mr Darling is Chancellor of the Exchequer with a very heavy guiding hand from Mr Brown. That would suggest that Mr Brown’s tenure is still ongoing.
This story from the BBC explains how the credit rating of the United Kingdom is under threat by excessive borrowed money. Thanks Gordon. In fact, Standard and Poors are worried that the UK debt level might reach 100% of GDP by 2013!!
100% of GDP!!
That is the sort of number that you would expect to hear when talking about a small Latin American country with a mis-managed economy and corrupt government elite. Not the UK.
Did I just say mis-managed economy and corrupt geovernment elite? Sometimes it is spooky how accurate I can be.
If the national accounts get much worse, the valuable AAA credit rating might be lowered. This would increase the risk associated with holding the debt and therefore markets would demand higher interest payments. This, obviously, makes the debt harder to repay and new borrowed money becomes more expensive. In other words, this is a slippery slope towards bankruptcy.
Interest rates may need to be raised to help repay the debt, hurting many in the country and doing no favours to businesses.
Sure, it would be a long way away. I don’t doubt that. However, fiscal policy would need to be improved dramatically - something which the current leadership seem unable to do - if it is to be avoided.
Needless to say, this is not a great thing for an investor. Stock markets are not immune to the goings on in the national economy or halls of government. In fact, they are profoundly connected.
And of course, this is an election year. Though it may only be a european election and therefore not a direct threat to Mr Brown as Prime Minister, the loss of voter support will be another blow to New Labour’s grip and his own position (depending upon how poorly they fare).
With the British public being almost born “eurosceptic“, and combined with the current scandals over politicians expenses, there seems to be little hope for him at this election. He’d be better off going on holiday…
Lets hope that he goes on a permanent vacation soon enough that the entire British economy has the chance to be saved.