That was a bit of an anti-climax, wasn’t it?
I only caught the last half-hour of the big debate between the men-who-would-be-chancellor last night on Channel 4. But it was enough to put me off scouring the internet to catch the rest.
If you didn’t catch it, you didn’t miss much. I’ll give you the potted version in a moment, and then we’ll discuss something more interesting…
Cable mentions things other politicians want us to forget
The big debate between Vince Cable, Alistair Darling and George Osborne didn’t tell us anything new. And I doubt it will have had much impact on people’s voting choices either.
As is standard these days, Vince Cable came off best. That’s partly because he’s under the least pressure in terms of worrying about votes. But to be fair to Mr Cable, he can also claim to have had some inkling that the banking crisis was coming. And he’s also willing to lay his ideas for dealing with it on the line.
Mr Cable keeps mentioning things that other politicians would rather we forgot. Such as genuinely reforming the banks, by splitting out ‘casino’ activities from retail functions, and getting rid of ‘too big to fail’. Smart people such as Mervyn King and Professor John Kay take this line too, so Mr Cable has the intellectual high ground here – it’s not entirely about populist politics, though there was a fair bit of that too.
But like it or not, we probably won’t get Mr Cable. We’ll get one of the other two. And they were pretty much as bland as each other. Alistair Darling was his usual calm, presentable self – an economic Dr Jekyll to Gordon Brown’s Mr Hyde – while George Osborne still seems unwilling to inject much passion or policy into the debate.
So there you go. Maybe the battle between the leaders will be better, but I suspect not.
Let’s turn to more important matters. What’s going on in the markets?
Greece has managed to borrow – but its problems aren’t over
Well, Greece managed to get a bond issue away yesterday. It sold €5bn worth of seven-year bonds at a yield of 6%. That’s not cheap – it’s roughly 3.5 percentage points above Germany’s borrowing costs – but at least people are still willing to lend to the Greek government. And the support it’s been promised by the EU and the International Monetary Fund would have helped.
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However, the country’s woes have by no means gone away. As Edward Hadas puts it on Breakingviews: “Ultimately, Greece has to make good on its existing €270bn of government debt, not to mention the roughly €25bn of new debt it is expected to raise in 2010.”
That’s no mean task. The Greek national debt is set to hit 125% of GDP this year. And as Hadas points out, “the most direct ways to get the debt level down – default and inflation – are both currently closed to Greece.” So it has to cut the debt the hard way. That means higher taxes and public spending cuts, but you also need a decent growth rate, or else there’ll be no tax to collect.
After crunching the numbers, Hadas reckons that, given its level of debt and the amount of interest that Greece is paying on its bonds, it “really needs a period of sustained nominal growth of 5%.” Now given that Greece is a less developed market than say the UK, this isn’t impossible. But against a backdrop of spending cuts and tax hikes, it’s not going to be easy.
Why the smart money’s worried about government debt
Greece is hardly the only place to worry about. Ireland – which had fallen off the radar somewhat after much rapture over its public spending cuts – now looks as though it’s going to have to pump another few billion into its banks.
And as Citywire reported yesterday, some of the smartest money in the market is fretting about rising sovereign debt costs. Philip Gibbs of Jupiter is well-respected, and with good reason. Since launching in 1997, his Financial Opportunities fund has returned around 800% compared to 42.5% for the FTSE Financials index.
And, due to his cautious management and ability to move in and out of bonds and cash, from February 2007 to February 2008, his fund lost just 3.5% compared to a 20% fall in the benchmark. And from February 2008 to February 2009 – the low point of the credit crunch – his fund actually managed to gain 4%, while the benchmark dived 60%-odd.
So he’s called this slump well so far. Which makes his recent actions worth watching. In January, he had just 13% of his portfolio in cash or equivalents. But as of the end of February, it was 52%. That’s quite a jump. So what’s got Gibbs worried?
According to Citywire’s Dylan Lobo, Gibbs fears that “the market is failing to price in the risks associated with sovereign debt problems, particularly those facing southern Europe. He is also increasingly concerned about the impact of a spike in bond yields in the UK, US and Japan.”
Says Gibbs, “Historically low rates and other economic stimulus measures have helped.” And while these measures remain in place, the bull run is on. “However, the earnings outlook and asset quality of banks faces a great deal of uncertainty in the West where governments are taking steps to reduce sovereign debt levels.”
Harder times are ahead
In other words, as public sector support is pulled from the broader economy, we can expect tougher times ahead. And if growth falters as this support is withdrawn, investors will start demanding higher yields as a reward for investing in the debt of heavily overdrawn governments – such as our own. That in turn will weigh on stocks.
To be fair, Gibbs has a nice safety cushion. You get rich by taking your profits too early. And having performed well over the period of the crisis, he can afford to play it safe.
But given his track record – not to mention the very obvious problems with sovereign debt which the market keeps wanting to draw a veil over – I wouldn’t want to bet against him.
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