Markets Are A Lot Smarted Than Politicians

Here's the latest from our Highly Placed Professional.

It's turning into a wild ride this Greek fiasco. Credit default spreads (CDS) are now back out at 600 bp for Greek debt, and we have all the signs of a classic default curve, with 1 year bond rates in the 11% area - the classic inverted bond curve that presages disaster.

Many commentators have looked at the politics and dubious economics behind the Greeks' collapse, and we all know the extent of their tax-raising problems. And even President Obama has pitched in and pleaded with the EU to sort the mess out. He knows that a lot hangs on this. It's in no-one's interest to see the rather fragile EU construct fall to pieces at this stage in the game.

When pointing the finger at 'speculators' and 'leverage', however, we do have to be a bit careful in apportioning blame. Who was most at fault ? The hedge funds and prop desks who bought the hell out of the CDS contracts to cause the Greek bonds to gap out, or the Greek governments which borrowed too much, for too long, in order to keep the state machine going ? Who employed the greater leverage at the end of the day ? The financiers, or the Greek authorities ?!

And isn't that the question which now faces us here in the UK ? We in the UK may soon be looking at a kind of structural default, where we simply allow ourselves to inflate our way out of the problem. The inflation rate is already around 3%, and we are only just meant to be exiting the recession! The advantage that Greece has is that it is at least part of something much bigger, which cannot be allowed to fail - the Euro. Is this the case with the UK, though, and will the markets continue to believe in the Labour mantra of growing your way out of our borrowing problems ? I think not, as markets are lot smarter than politicians.

New Labour's dream of boom without bust was really nothing more than a rather unsophisticated leveraged debt play. The fact is, we're now on track to double the money supply, double and then quadruple the national debt, and still allocate over 50% of our GDP to public spending programmes.

And the politicians have no choice because, like Greece, the alternatives are just too nasty to think about - mass unemployment, austerity biting into the fabric of society, social unrest, and most important before an election, no votes at the polling booth!

But make no mistake, we in the UK are in a similar space to Greece. How ironic that Greece's high point of recent times was the Olympic Games of 2004. Will 2012 be our Waterloo ?

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