A different kind of AAA rating?

Just I have feared for months – and repeated first thing this morning: the pound and government bonds have been on the slide again. Today the pound has fallen below $1.50. The price for the government to borrow for ten years is now 4.1%, compared with the 3% when the problems intensified.

That’s the market’s verdict on what is going on. It’s making us all poorer. It is a warning to the government that the deficit is too big and it will undermine our economy more if left to run out of control.

As I keep explaining to journalists who ask me what is the importance of the AAA rating, it’s all a question of how much taxpayers have to pay in interest to be able to borrow for more government spending. The UK already has a different kind of AAA rating from Germany’s – we pay more to borrow. What matters is the interest rates paid, whether or not the rating agencies have adjusted, and whether they adjust before or after the market movements. So far the markets are making up their own mind regardless of the rating agencies.


  1. APL
    March 1, 2010

    Mr Redwood, there is out and about a document implying that a named country* (Italy) entered into 'off balance sheet' loans with a finance partner (Unknown) in order to give its national accounts the impression of meeting the criteria for the Maastricht treaty when in fact they did not.

    If it turns out the Italians did not meet the specified criteria set out in Maastricht, what effect does that have on the legality of the Treaty – given that all other contracting parties did so in 'good faith'?

    *While Italy is named, there is the suspicion that Greece was up to the same sort of tricks too.

    JR: "That’s the market’s verdict on what is going on. It’s making us all poorer."

    I have for some time thought gold overpriced, but if the governments spending is not constrained soon, it may be the only way to get some of your wealth out of the country.

    Reply: It is well known and documented that several countries used various financial instruments and financial contracts to reduce their stated debt. It makes no difference, as the legality of the single currency Treaty rests with the members of it, who seem quite happy with what has gone on in their name.

  2. Giles
    March 1, 2010

    I still think a little perspective is required here. Borrowing at 4.1% is now a total crisis? I am reading about 1976 at home. Not being able to borrow at any price is a crisis. THis is a 'debt interest may be 0.1% more of GDP than previously' sort of event.

    Some of the difference is higher inflation expectations, not credit. To some degree, the fact that the eurozone cannot shift very low expectations of inflation is an indictment of their ability to get themselves growing. Whereas with manufacturing optimistic in this country, we are at least not in that position.

    Where would you rather be – Europe with 3% yields or Britain with 4.1%?

    1. Mike Stallard
      March 1, 2010

      If you are sliding down a hill, at first, you go very slowly.

      1. Giles
        March 1, 2010

        Sure. And we are sliding down a hill in the dark.

        But you have to pay attention to the exact situation too. Our maturity shape and rates on debt mean that we are a long way from spiral dynamics – we have plenty of resources to prevent interest being unaffordable.

    2. APL
      March 2, 2010

      Giles: "Borrowing at 4.1% is now a total crisis?"

      Borrowing by itself at 4.1% may not be, but with catastrophic decline in tax returns, coupled with increasing borrowing – the event horizon where your cost of servicing the debt exceeds your income draws closer.

      We do not know the extent of Browns off balance sheet borrowings over the last decade, either.

      Mike Stallard: "If you are sliding down a hill, at first, you go very slowly."

      Exactly. And as we do not know the true extend of the debt, we do not really know where on the slope we started.

  3. Javelin
    March 1, 2010

    Important quotes in the FT this morning from Jim Pickard. Who says that credit rating agencies follow the market. YET the rating agencies still saying they are not going to downgrade the UK.

    I believe the credit rating agencies have been bullied by Brown – because last year all the talk by politicians was of how badly the credit rating agencies had behaved – then it suddenly stopped. I think a deal may have been struck not to down grade sterling in return for lighter regulation.

    Here's the quote that sums the situation up …

    "UK gilt yields, at 4.07 per cent, have risen to higher than Italy – at 4.03 per cent – for the first time in 18 months. Italy’s S&P rating is A+ while the UK is still AAA." – Jim Pickard

    1. Michael Lewis
      March 1, 2010

      Agree with the sentiment. UK govt is a big customer of the ratings agencies, so there is your answer. Of course the UK is no longer AAA. As for the US being downgraded, I think Gitmo would be on the minds of the rating agencies 😉

  4. Stuart Turner
    March 1, 2010

    Edmund conway of the Telegraph has published an article on the on-line version of the Telegraph showing that the recession was deeper than previously thought with Q1, Q2 and Q3 of 2009 being revised down and any perceived recovery due to various fiscal stimuli such as car scrappage the reduction in VAT and Q.E.

    Of course these stimuli threaten our long term recovery by adding to our structural deficit and thus hampering private sector growth.

    Therefore it would seem that a so called double dip recession is unavoidable. How long do you think it would take for a cut in corporation tax (one of our proposals) to start improving our economic output?

  5. Brian Tomkinson
    March 1, 2010

    I have questioned for some time just why the markets haven't acted more severely against sterling and government borrowing. With the narrowing of the opinion polls I suggested last week that they might now act. How significant is it that they waited until after hearing Cameron's speech and have now started to move in the knowledge that there seems to be no political party prepared to take the necessary action without being coerced? The political class has let down the people of this country and none of them seems prepared to prevent them from completely ruining all of us.

  6. Lola
    March 1, 2010

    As I said at the time of the failures of Northern Rock, RBS, Loyds TSB and all the other banks, this is not market failure at all – it is the market passing an accurate judgement on the failed policies of various international governments.

    Now the bond market is passing the same accurate judgement on Brown and New Labour. It is passing direct judgement on those failed policies.

    The next thing to understand is that the 'market' is not something separate from me and you. It is me and you. Since, when all is said and done and the various accounting niceities are netted off, all the wealth in the world is just people and things. No government has any money at all – unless they are totalitarian. Oh yes. Of course. Silly me. For one moment there I had slipped back into the time when a citizen of the UK had liberty and the State was vaguely accountable.

    In my next life I am either coming back as something decorative and useless, (although clearly not Gordon Brown, as although he absolutely qualifies under the uselessness test, he is not – according to Mrs Lola – in any way decorative at all, in fact she finds him utterly creepy) – or the bond market.

    1. APL
      March 2, 2010

      Lola: "this is not market failure at all – it is the market passing an accurate judgement on the failed policies of various international governments."

      Yes, thank you for pointing that out.

      For politicians, the market is only working when it provides the finance to do whatever hair-brained scheme they are currently using to buy votes.

      When a hair – brained scheme is recognized as such and no cash is forth-comming, suddenly, 'Market Failure'!

  7. Mark Parker
    March 1, 2010

    Strictly speaking there's no mechanical connection between what HMG pays to borrow and the S&P etc rating. Gilts are auctioned and lowest yield/highest price wins.

    However various funds, such as pension funds, are required to invest in AAA only to avoid risk so there would be a one-off sudden lurch upwards in the cost of debt. And with a shortage of buyers the day the world says "no" comes a fraction nearer. Since the world is still buying Greek debt I don't think that day is particularly close (although the effect of withdrawing QE is still unquantitified.)

    Other than that it's really a question of national pride.

  8. JohnRS
    March 1, 2010

    Doesnt seem as if the markets have taken much comfort from the weekend Tory gathering, or the recent poll results.

  9. Donna W
    March 1, 2010

    On Politics Home today they are reporting a poll which says "The public believe that deep cuts in public spending from the next government would be a greater worry than failing to reduce the deficit quickly enough." Because Gordon has been propping up the economy by printing money and racheting up our debt, he has deferred the pain of the recession until post-election.

    Most people don't realise that the worst effects of the recession have been deferred and the bill, when it lands, will be huge. Until they start feeling the pain with higher interest rates adding to their mortgages and additional taxes to pay back the debt, they will not accept that getting down the deficit is the number one priority.

    I am fast coming to the conclusion that the best thing that could happen to this country is for it to look like Gordon is going to win the election; for the markets to take fright and the UK lose the AAA rating; for Sterling to dip below the Euro and head towards parity with the dollar. Then the numpties might wake up and smell the coffee.

    1. Javelin
      March 1, 2010

      I agree, the public need to feel the threat of a crisis to take remedial action, otherwise we will crawl along injured for years.

    2. Denis Cooper
      March 2, 2010

      "Most people don’t realise that the worst effects of the recession have been deferred" because neither the Government nor the Official Opposition are being straight with the public.

      It quickly became obvious that quantitative easing was being used to prop up (rig) the gilts market so that the Government could carry on borrowing and spending as per normal.

      Out of the £200 billion of new money created so far, £198 billion has been used to buy up previously issued gilts so that the Treasury could continue to borrow by selling new gilts.

      The Bank might as well have bought new gilts direct from the Treasury, but not only would that would have contravened the Maastricht Treaty in a very blatant and undeniable way, it would also have been more difficult to disguise what was going on.

      That may have been the right thing to do, to some extent – if the Treasury had found itself unable to borrow, it would have been necessary to make precipitate cuts in public spending, driving down GDP by far more than the 6% actually experienced – but the manner of its execution has been deceitful, and that has fooled some of the public into a false sense that the economy has stabilised.

      If the Government had used the breathing space provided by quantitative easing to start the process of cutting public expenditure and reducing the budget deficit, then there would have been a justification for printing money and using it to prop up the gilts market, even though in normal circumstances that would be considered the kind of market abuse which can lead to criminal prosecutions.

      I warned last spring that the chosen method of quantitative easing would have both economic and electoral implications:

      "Shouldn’t the FSA have a view on the government rigging the market in its own bonds?

      And shouldn’t the Official Opposition also have, and forcibly express, a view on that?

      Mondays and Wednesdays, Bank of England uses newly created money to buy existing gilts and remove them from circulation.

      Tuesdays and Thursdays, Treasury’s Debt Management Office sells new gilts to help fund the government’s budget deficit.

      Nothing peculiar about that? And no political or electoral implications worthy of note by the Official Opposition?"

      "It seems to me that Osborne has been completely wrong-footed by the Labour government’s sly, but fairly primitive and transparent, abuse of “quantitative easing”, and the Tories may pay a heavy political price for his continuing failure to speak out against it.

      If the government’s plan works –

      They’ll break the rule that every Labour government eventually runs out of money;

      They’ll be able to mitigate the impact of the recession, and buy electoral support, by spending more even though tax revenues are falling … "

  10. no one
    March 1, 2010

    great post john, just wish id bought dollars when i knew i should have done

    1. John East
      March 2, 2010

      There's still time, sterling has a long way to fall yet. As for buying dollars, I hope you mean Australian or Canadian, not US.

  11. Mike Stallard
    March 1, 2010

    This most excellent blog has foretold this moment for months. Now it is happening as inevitably as the sinking of the Titanic.
    Open Europe, by the way, says that mr Rompuy is about to get tough with the banks who go for the Euro. He is, apparently, going to withdraw their licences. He will learn, to his cost, that you simply cannot buck the markets. They are far too powerful.

    1. John East
      March 2, 2010

      So, this pathetic little bureaucrat with all the charisma of a damp rag (to coin a phrase) is going to withdraw the licences of JP Morgan and Goldman Sachs? You are spot on Mike, it isn't going to happen. I think this is simply a bit of sabre rattling in response to the farage attack. Weak people, like Von Rompuy often over compensate it their attempts to look strong, but as soon as the Wall Street banks shout, "Boo", that's the last we'll hear from this non-entity on this subject.

  12. English Pensioner
    March 2, 2010

    If the Government is having to pay over 4% to borrow, why do they pretend that the bank rate ia 0.5%.
    And why won't they pay me that much on my National Savings?

    1. Donna W
      March 2, 2010

      1) Because this Government is made up of (misleaders-ed) – and is led by the (Misleader-ed) in Chief.
      2) Because they really don't care about you or any other savers. They only care about themselves and fooling the electorate into voting them back into power in May.

  13. Steve Cox
    March 3, 2010

    According to today's newspapers, we have the highest rate of inflation in the western world (deflation doves, hello, are you awake?). It's pretty clear that we have the most depreciated and unloved currency in the west, maybe even in the world at the moment (the Zimbabwe dollar gained 1.7% against Sterling a few days ago)?

    It's obvious to anyone – other than a significant section of the British electorate, it seems – that as a nation we are becoming poorer at an alarming rate, due to Brown's profligate idiocy and Mervyn King's lunatic policies at the BoE. It will take time for this to feed through into much higher prices at the petrol pumps and the ffully ood counters in the supermarkets, but we have been betrayed by our (scornful hah!) political leaders and the (even more scornful hah!) supposedly independent and professional economists and financial experts who should have been screaming blue murder a long time ago.

  14. Anonymous
    March 26, 2010

    Credit rating are in my opinion not really objectiv and in the end they didn't help to prevent the recession and all the problems.

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