Renewed Sovereign debt concerns – are we a ‘Pig in a Poke?’
FEBRUARY 17TH, 2010 By GUEST
Today we would like to introduce Andrew Morris. Andrew has over 25 years experience in stock broking and for the past 15 has been a senior fund manager with Rowan Dartington Portfolio Management now known as Signature. We’ve invited Andrew to give us his take on the economic trials and tribulations we’re all likely to face in the year ahead.
Andrew
“Having just read Dominic’s most recent Blog, I can whole heartedly agree with the benefits of having a holiday in January. It has allowed me time to take stock and have a well earned break from “the business”. However, it has also provided me with an opportunity to reflect on market sentiment and the key issues that are facing us in this Election year.
So whilst not actually at work, I found myself thinking about work! It is worth noting that there has been a noticeable change in sentiment in the first few weeks of the year. The euphoria of 2009 and the optimism for economic recovery seems to have evaporated and moods are once again, turning to Budgets, government debt concerns and belt tightening. We are not alone as many members of the G7 have sought to tackle the consequences of a Global recession by “gearing up”. However as concerns over their ability to service this growing debt pile, attention is focusing on the EU’s ability to deal with these very issues effecting Greece, and realistically Portugal and Spain, following on from last years crisis in Ireland. Now collectively known as the “PIGS”.
With government finances looking pretty stretched and gilt issuance continuing at unprecedented levels, the risk of the UK losing its AAA credit rating and the possibility of us defaulting on interest payments, will continue to be discussed.
Let’s consider the facts. Gilt issuance is 2009/10 is likely to be £225bn and current estimates suggest that a similar figure will be required in 2010/11. Quantitative Easing (QE) has distorted the yield curve by creating buying support. The refinancing of the UK Banking system has required finance houses to purchase AAA rated gilts to improve balance sheets. Overseas investors have also been key supporters of government issues. Now that QE has been paused, the banks appear to be refinanced and overseas investors have become increasingly reluctant to support gilt auctions, unsurprisingly gilts have become increasingly more volatile with yields, on the whole, increasing.
To put this issue in context, we estimate, that in 2010/11 each 0.25% increase in coupon will cost the UK government (i.e. us) £550m a year in extra interest! Thereby compounding our Budget deficit. The scale of these numbers is simply staggering, and reaffirms our House view that with the exception on Index-Linked gilts, we have shyed away from traditional gilts, favouring Sterling denominated Bonds issued by the European Investment Bank (EIB’s). With the Maastricht Treaty not empowering the EU Central Bank to bail out Greece, developments concerning this situation will be closely watched by the financial market, as this is likely to set the tone for how other Sovereign bonds are treated.
We will have to see how this situation resolves itself, but we should be in no doubt that the next 12 months will require a number of potentially unpalatable tax raising/ cost reducing measures. All this and potentially the prospect of a faltering economic recovery. Let’s hope we don’t join the ‘Pigs in the Poke’.”
Andrew Morris, Managing Director, Signature
Posted in: General Information