UK: The Bond Market Will Rule

May 12, 2010

A new government. Well la-di-da. It doesn’t matter which variety of drone is in power, the threats from corporate propagandists keep coming, urging rapid and brutal austerity measures to assuage their investors.

Initially, David Cameron might have thought that their songs of doom would relent. After all, “analysts” had been puffing up a Lib Dem-Conservative coalition as their preferred option.  As Lauren Rosborough, “senior currency strategist at Westpac” puts it, “The Conservative/Liberal Democrat coalition was the best solution for the markets” or as Richard Macguire from the Royal Bank of Canada argues, “From a market perspective, a clearly far more favourable outcome than a potentially highly fractious power-sharing arrangement between Labour and the Lib Dems in concert with several fringe parties.”

Some elements of the business elite certainly provide some immediate comfort to the victorious slightly less defeated PM. Somewhat optimistically, for example, Richard Lambert, head of the CBI tells us that “Business wants to see a stable government with the authority to take the tough decisions that will be required to keep the economic recovery on track and to get a grip on the fiscal deficit” and that “This coalition should have the votes and the mandate to get on with the job.” How a coalition between a party with 36 percent of the vote and less than half of the MPs with a party with 57 MPs, many of whom detest their political partners has a “mandate” to implement social misery, is a mystery. But it’s nice for Cameron to know that Lambert cares.

And we should add a slew of analysts, like Orlando Green of Credit Agricole, who says that “The market would prefer the Conservatives and Liberal Democrats” due to “The Conservatives’ fiscal credibility” and Steven Major of HSBC, who says that “City would be reassured in the event of a Conservative deal with the Liberal Democrats.”

So Cameron might think that the financial mavens in the city would relent, just for a while, as he accustoms himself to number 10, and his odd assortment of cabinet members (whoever they turn out to be). But no.

Analysts who were queuing to torpedo a Lib Dem-Labour-Greens etc.. deal are now lining up to put immense pressure on the Tory-Lib Dem government to put deficit cutting at the centre of everything they do.

David Frost, director-general of the British Chambers of Commerce, writes that “The BCC wants to see the delivery of a clear and achievable plan for business over the first 90 days of a new administration – a plan that puts business growth at the centre stage.”

Alan Clarke of BNP Paribas (whose report yesterday dented any hopes that Gordon Brown harbored for a coalition), now says that, “While it is positive that the political limbo is over, we have reservations about the agreement.” For BNP, “the new government is using up fiscal ammunition in order to glue the coalition together, rather than targeting its bullets at narrowing the budget deficit.” It’s easy to forget that the government Clarke is attacking has not even been formed yet. Madness.

Another turning worm is Marc Ostwald, eminent analyst at Monument Securities, who said yesterday that “the best option is a Conservative-Liberal Democrat coalition and that’s what we’re going to get.” But today, he tells us that “This is going to be a very fractious coalition, both in terms of the relationship between the two parties, as well as internal party divisions” while “the risk of the government falling long before the end of its term remains high” and that, “as there are almost certainly going to sharp cuts among the public sector’s six million employees” a key concern is “how will such a fractious coalition deal with the strikes that are likely to occur.”

Propagandists like Ostwald move smoothly from boosting preferred political forces, to pressurising them to act against workers, in favour of bondholders and other financial speculators. You can’t see this much more clearly than in the analysis of one Kenneth Broux (“market economist at Lloyds Banking Group”) who comments that “Yesterday’s relief rally has petered out but I do expect the new government to take quick action on spending cuts which should keep the ratings agencies on side.”

The sotto voce threat that ratings agencies might downgrade the UK, making borrowing much more expensive, is emerging as a propaganda theme from the city thugs. As Charles Niebel (“strategist at Nomura”) puts it, “If they manage to put through the austerity measures, you can presume the triple-A rating is pretty safe. But that’s a slow burn. It’s cold hard facts we’re waiting for now.” And remember too that yesterday’s rapid resolution to the political process was stimulated by BNP Paribas analysts claiming that rapid measures to tackle the budget deficit would put the UK’s AAA rating in doubt.

Yet the financial world is not monolithic. Although the voices of urgency and crisis are more dominant, alongside the hysterical rhetoric of bond vigilantes (the current term in the trade for extreme deficit hawks, it seems) is counterposed to longer term investors.

Moyeen Islam, an analyst at Barclays, for example, cautions us that “The mistake people are making is that they have been looking for some sort of instantaneous response to the on-going negotiations over the government but this is not an immediate thing.” Moyeen essentially reiterates what should be a banality – all of the major parties are keen to slash the deficit sharpish – stating that “Within the next couple of weeks you will start to see a reaction if the government, whoever that may be and whatever form it might take, doesn’t have a credible deficit reduction plan.”

Islam provides us with a little peek into how the financial world toys with political systems. Obviously, all parties are committed to deficit reduction. Hence, markets would not immediately savage the UK economy regardless of the make up of a government. But, as the Tories tend to provide a good environment for speculative capital, and capital in general, it’s necessary to prod politicians in the correct direction. Hysteria helps a great deal, it really does.

But in reality, the British economy can totter around for years with deficits larger than at present. The brute fact is that government bonds are hot property right now. According to the Financial Times, at yesterday’s bond auction, government debt was “flying out the door” and demand for gilts is actually rising relative to last year. One “European investor” told the paper that “There is a real sense that the UK is a haven – somewhere your money can be invested safely with so much turbulence in Europe” while Elisabeth Afseth from Evolution Securities said that “Having the auction at a time when there’s so much political uncertainty, and getting it away, is impressive.”

That auction was before any news of a Conservative-Lib Dem deal. The economy chugged on beneath politics, as it tends to do. And the elevation of Cameron was not accompanied by economic bliss, with the FTSE opening down and the pound rising, then falling. Apparently politics/democracy and economics are not as symbiotic as financial analysts want you to believe.

Democracy and markets are obviously in tension, and far more so right now as financial institutions are demanding austerity measures across Europe, so that their vested interests (bonds, speculative debt and low wages) can be propped up or enhanced. What’s impressive is the degree to which these institutions can mould the media landscape, and the political world too, convinvcing people that there is no alternative to rapid, massive, budget cuts – or else.

The underlying stability of government debt belies this. But there is a genuine outburst of “bond vigilantism” across Europe, taking down Greece and targeting Spain, Italy, Portugal, maybe even the UK. Yet such actions can be defused by political actions, which call into question the legitimacy of speculative attacks on national economies. Massive national bail outs don’t make sense on their own, as they do nothing to stabilize international capital movements and tend to support the myth that the central problem is the level of national debt, and not the financial structures which allow national economies to be attacked so ruthlessly and rapidly by multinational corporate raiders.

The UK has just lost a key battle in the war against bond vigilantism, not necessarily by the loss of a “rainbow coalition” but by the hasty creation of the Lib Dem-Conservative union, under pressure from the start to make deficit cutting the absolute, inviolable priority.

Gary Jenkins, an analyst at Evolution Securities puts this well, saying that “The bond market will rule the UK whoever’s prime minister.” And here’s how. The CEO of Evolution Securities, ex rugby player Alex Snow, “claims to be a friend of the shadow Chancellor, George Osborne” and “is thought to be keen to use his relationship with the bank to leverage his contacts in new regions” while the firm also has a Tory peer on its management team in the form of ex-cricket administrator Lord Maclaurin. No wonder they are so confident that the austerity packages they so desire will be fast-tracked.


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