If Greece Is Bear Stearns, Will the UK Be Lehman?

Great little piece on CNBC yesterday which posed the above titled European debt contagion question.

Sunday’s news of a 750 billion euros ($951 billion) stabilization fund and European Central Bank assistance for the European bond market averted a full fledged liquidity crisis, but many remain sceptical that the crisis has past.

Can the governments in Greece and Portugal live up to their end of the bargain and significantly cut government spending in the face of bitter opposition from voters?

“The big question I am asking myself is whether Greece is Bear Stearns,” Anthony Fry, senior managing director at Evercore Partners, said. “What I really fear is that if Greece is Bear Stearns then the UK is Lehman Brothers.”

Fry, it should be noted, worked for Lehman before its collapse.

There is an insistance that the UK will be alright because it has the ability to sell government bonds internally.

Steven Barrow, the head of G10 Research at Standard Bank, holds that opinion. “I am confident about the prospects for the pound,” Barrow said.

The difference between the UK and Greece, according to Barrow, is that Britain has more room for maneuver. “The UK can devalue and print money, the UK will not default, the UK will not need the IMF,” he said.

Sounds like a recipe for currency collapse to me.

And Anthony Fry is adamant that such analysis is nonsense.

“I can’t believe (the UK) can avoid trouble," he said. "The current coalition talks are like arguing over a birthday cake. Once they decide how much of the cake they get they realize no one bothered to bake the cake.”

Fry makes the exact same point I have been making the past few months; with a lot of money needing to be raised over the coming months and years, UK borrowing costs are going to move sharply higher.

“My big fear is that after (Chancellor of the Exchequer) Alistair Darling refused to support the EU/IMF/ECB bailout of the euro zone bond market, the euro zone may stand by and do nothing when the UK gets into trouble,” Fry said.

Fry remains worried about the problems facing Greece will spread to Spain and Portugal despite Sunday night’s unprecedented support.

“Tuesday was a correction post Monday’s huge short squeeze," Gallagher said. "The big question now is whether institutional investors will return to the European bond market.”

Meanwhile Pimco, the world’s largest mutual fund, made the decision to stay clear of a proposed Greek dollar-denominated bond auction last month and that decision was one of the key moments leading up to Sunday’s rescue package. The coming weeks and months, July in particular, will be crucial. That's when €227 billion redemptions come up in the euro zone and with Spain needing to refinance significantly that month.

“What we are likely to see is a two-tier Europe," Michael Gallagher, director of research at IDEAglobal, tpld CNBC. “A double-dip recession in Southern Europe is increasingly likely. Core Europe will slow, but do OK. The outlook to the South is far worse.”

All these agreements are predicated on the EU governments meeting strict budget targets and stepping up debt consolidation efforts. Which means the Achilles Heel in Sunday's agreement is governments resisting expansionary, deficit financing once its economic fortunes begin to falter.

The United States has been unable to break that cycle, what makes anyone think the PIIGS will be able to?

So, if if Greece is Bear Stearns and the UK is Lehman, who will be AIG?

“No comment," Fry said.

I'm willing to be it will be California.

As I said last week: first the PIIGS, then the UK and then... the United States.

Are you prepared?

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Bank of England Chief Economist Warns 'Interest Rates Set To Soar'

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In a stunning display of candor Spencer Dale, the Chief Economist for the Bank of England, has warned the British people that interest rates will rocket as the Bank of England battles to keep inflation under control.

As reported in the London Daily Express on March 28th, Spencer Dale told insurers the Bank would remain focused on inflation, regardless of the pain that it would cause millions of home owners as their mortgage payments soared.


Dale, a member of the Bank’s ­Monetary Policy Committee, which sets interest rates, said: “The committee adjusted monetary policy boldly and ­decisively on the way down in order to meet the inflation target. And let me assure you that, when the time comes, we will be prepared to respond with equal vigour on the way back up."

In a speech to the Association of British Insurers, Mr Dale stressed that the Bank of England’s priority had to be keeping inflation within the Government’s two per cent target.

Figures out this week revealed a surprise rise in the Consumer Prices Index from 3 to 3.2 per cent, with an increase in the cost of food and drink being blamed. While inflation is still expected to fall sharply as the recession takes its course, the CPI figures caught experts off guard.

There are growing fears across the UK that the Government’s decision to print more money – an action known as quantitative easing – combined with high levels of borrowing and spending are throwing things out of kilter.

But Dale insisted the economic slump was showing no sign of easing yet and warned that not all the actions taken by the authorities so far were having the desired affect. “So there may still be more to do.”

As predicted here last week, it means that England plans on continuing with the 'quantitative easing' policy of printing more money. More importantly it cleary plans to dealing with the consequences of printing massive amounts of money in a drastic and dramatic fashion when (and not 'if') inflation comes.

The article goes on to note that if the Bank of England feels it is losing control of inflation, "a sharp rise in the base rate is likely to be employed as a blunt instrument to encourage a slowdown."

Liberal Democrat Treasury spokesman Vince Cable said, “the danger of such aggressive interest rate cuts and the start of quantitative easing is high inflation further down the road. The Bank of England is right to warn that record low interest rates are not sustainable in the long term."

Indeed they are.

And while some UK financial experts, like Jonathan Davis, are quick to soften the Bank of England's warning by arguing that he does “not envisage them raising interest rates for quite a long time to come," even Davis was forced to admit that “in the long term we are going to have very high inflation and we could have 1970s-style inflation."

Which is exactly what we have been predicting on this blog for several months now. And while we may not receive such candor from our own Bank of Canada, make no mistake... the policies of Canada, America, Japan et al, to print massive amounts of money to 'stimulate' our economy are going to come with the same dramatic consequences being forcast by the Bank of England for the UK.

And those consequences are particularly ominous for the Village on the Edge of the Rainforest.

For if the Bank of England says they will remain focused on inflation - regardless of the pain that it would cause millions of home owners as their mortgage payments soared - can there be any doubt that the Bank of Canada will act any differently?

Not a chance, 22% mortgage rates, anyone?

It's coming - you can count on it. And remember, it only means a mere monthly payment of $11,9000 on your $650,000 mortgage.

Gosh... it's a great time to buy real estate, isn't it?

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Email: village_whisperer@live.ca