Update :

March 15 (Bloomberg) — The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

Update : II : Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said under the ratings company’s so-called baseline scenario the UK will spend more on debt service as a percentage of revenue this year than any other AAA rated country: “We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing … This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.” Moodys predicts the UK will spend 7% of tax revenue servicing debt this year and between 9% and 12% in 2013. Financing costs above 10% automatically put countries outside of the AAA ratings category.

Update : III : For a completely different take, see the BBC -  UK Credit Rating Viewed As Safe

Just how much debt-fuelled danger is Gordon risking with the UK economy?  A reasonable question and the only place we can get hope to get objective answers is from the debt default insurance market place.  Harriet claimed at PMQs yesterday that it is unpatriotic to ask questions about the British economy.  As an Irishman that doesn’t apply to Guido.

Chile has just had an 8.8 on the richter scale earthquake, looting and rioting are commonplace.  Even so, U.S. investors still prefer Chilean government debt to UK government debt as measured by CDS rates.  Do you get how bad things are?

Data source : Morgan Stanley

Gordon loves to quote the policy endorsements of Paul Krugman, the New York Times columnist and Nobel Prize winner – always neglecting to mention that Krugman is a friend and ally.  The New York Times today however is not so keen on Britain’s economy.

The business section is mainly read by Wall Street liberals, nevertheless they run investment funds that move markets.  The UK this morning is bracketed with Greece, the NYT warning that if the Tories don’t get a strong majority:

“… investors could start to make it greatly more expensive for the government to raise funds, setting the stage for a potential double-dip recession, if not worse… If you really want a fiscal problem, look at the U.K… In Europe, the average deficit is about 6% of G.D.P. and in the U.K. it’s 12%. It is only just beginning… the British government … has been able to finance a budget deficit of 12.5% of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.”

As the pound slid Nick Clegg tried to reassure investors that if there is a hung parliament the LibDems would not risk Britain’s creditworthiness – surely that effectively means he can’t prop up Gordon Brown.  Clegg said this because he realises that once foreign investors realise the only buyer of government gilts last year was the Bank of England and they lose confidence in a Tory election victory, they could rush for the exit.  Foreign holdings of gilts fell from 35% to 29% last year.  Capital flight is already starting…

The pound has just fallen through the psychologically important €0.90 cents to the pound level, if it were not Greece we would now have £/€ parity.  It is sinking against the dollar as well. Think what a hung parliament and the inevitable political paralysis would mean for deficit reduction.  Markets would go into a tailspin, the cost of borrowing would rise. We would be looking at a Greek tragedy…

UPDATE : Gilt market has opened down as well.   The market has already removed the Triple-A rating on UK government debt.

The papers are reporting an emergency EU meeting over Greece.  Gordon is attending despite the UK not being in the Euro.  At the end of last week Guido learnt that next week Gordon is scheduled to meet George Papandreou, the socialist Greek prime minister who has led his country to ruin. Perhaps they can compare notes or put in a joint application to the IMF?

Until the recent Irish austerity budget the financial world talked about the risk of the P.I.G.S. (Portugal, Ireland, Greece and Spain) defaulting on their sovereign debt. Now Ireland is controlling government spending with swingeing public sector cuts they are not being talked about so much. Attention has shifted to the S.T.U.P.I.D. countries: Spain, Turkey, UK, Portugual, Italy and Dubai. These are the countries the City now fears to be at risk of sovereign default.

ZeroHedge has created a S.T.U.P.I.D. index, which they are charting, it is a Credit Default Swap index, so bad news means the chart goes up.  For the record, Guido thinks there is no chance of the U.K. defaulting because we still control our own currency, though losing our AAA credit rating and devaluing is a very real possibility.  The market is pricing in the credit risk from Gordon’s economic stupidity nevertheless…

Today on Threadneedle Street in the City, the Monetary Policy Committee meets to decide the Bank of England’s base rate and whether or not to keep the printing presses running   The base rate is currently of symbolic importance (unless you have a base rate tracker mortgage), because prevailing real world market rates are far higher than the official 0.5%.

Has QE worked? We will never be able to answer that question definitively.  Economists will argue forever about what would have happened if things had been done otherwise.  We can however point to unintended consequences of the Anglo-American monetary splurge. Commodity price inflation, a non-trivial £200 billion unwinding problem in the UK, a yet more burdensome government debt disaster.  The evidence is that QE has largely allowed the Bank of England to buy the government’s new debt giving foreign investors an exit route.  Pimco, the world’s biggest bond investor has taken that exit route from gilts and says they are now resting on nitro-glycerine.

For £200 billion we got growth of 0.1%, the longest recession in history and a 6% drop in output that saw Britain as the last major country out of recession.   Most worryingly of all, inflation is now ready to rip.

The recession came to a technical end last week.  With that QE should come to an end.  Policy makers need to perform a trick never accomplished before anywhere in the world at any time in history, turn off the monetary liquidity flood without lagging inflation jumping, sterling collapsing or the economy seizing up. Mervyn’s memoirs will make interesting reading.

Yesterday’s GDP disappointment makes the case for a tax cutting Emergency Growth Budget even stronger.  Policy Makers have got to go for growth, you can’t tax your way to prosperity.  Or else the cat gets it…

Graphic : Taxloss via Alphaville

Annual consumer price inflation increased by its greatest ever amount in a single month in December, that is well well above the Bank of England’s 2.0% target and consensus economist’s expectations that it would come in nearer 2% today.

Get your wheelbarrows out, stock up on gold and baked beans. Here comes inflation…

See also : Coming Soon : Double Digit Inflation, Double Digit Inflation is a Black Swan, Bank of England Pension Fund Surges Betting on Inflation, Yo Dude, Where’s the Deflation?

At 10.30 this morning we will have the first auction of government debt this year.  Gilts are ticking down* a little as the market awaits the outcome of the sale.  Mandelson is being wheeled out today to say that – shock, horror – the First Lord backs government policy; emphasising spending reductions, tax increases and reducing the deficit, all to reassure the bond markets.

At the same time Alastair Darling is introducing a Fiscal Responsibility Bill, to be debated  today, in the latest effort to reassure investors after Darling in 2008 scrapped rules to contain the deficit, he now repents:

“Whatever the economic circumstances, whatever the government, we need rules and objectives to govern fiscal policy… It is important we have that discipline.”

You can say that again.  Spending prolifically in the credit-boom years wasn’t prudent, it was reckless fiscal madness.  It was Brown’s delusion.  We really need to go further and introduce a balanced budget law, forcing the government to live within its means.  Today’s auction of £4 billion of gilts will cover a week of government overspending under the Brown and Balls economic plan.  The reality is we need to control spending as soon as possible. 

Creating spend / cut dividing lines is crass partisanship, not working in the national interest…

*Guido is short the market.