99 Problems But A Bond Aint One!

Youth unemployment is at its highest for twenty years, economic growth teeters above zero and inflation is double the official target. So why, in one respect, are we the economic envy of the Western world?

The holy-grail of government finance, the AAA rating, eluded America this summer. Standard & Poor’s decided that a $14.3trn current deficit was enough to swing the balance out of Obama’s favour. Yet the UK clings on to the coveted credit credential.

And while the fiscal difficulties of the Europe’s periphery are no secret, it emerged this week that France is at risk of a downgrade and even the Wirtschaftswunder came under fiscal-fire.

The UK appears to have emerged as an unlikely safe haven for holders of government bonds, with yields falling to 2.5% last week, an all-time low. This means lower debt repayments for the UK government and, ultimately, for the tax payer. Combine this with the erosive effects of 5% inflation and our national debt appears ever so slightly less crippling.

As One Story Ends

The US debt ceiling was finally raised this week, putting an end to months of long drawn out negotiation.  America is safe to go on spending, and holders of its debt can breathe a much anticipated sigh of relief. For now…

Both S&P and Moody’s  put America on a downgrade review last month and the successful debt deal will be unlikely to have much of an influence on this. America losing is AAA rating would poise 2011 to be a worse year for the global economy than 2008. 

Europe’s periphery teeters on the edge of sovereign default, The UK’s recovery is stuttering and the purchasing manager’s index revealed this week that global manufacturing slowed in the second quarter. Add a US downgrade to all this and you’ve got yourself a global double-dip recession.

Equity markets on both sides of the Atlantic have been shaky for several weeks now and one cannot help but reflect on the events of the three years ago. 

Seemingly these fears were shared by The Bank of England and The European Central Bank as both declined to raise interest rates this week, whereas base rates have been raised of late in both India and China in attempts to stave of inflation.

In spite of the breakthrough in Washington, the outlook for The US and indeed the world remains turbulent.