Barrel Strength

The amount of bad news associated with UK these days makes it difficult to find a starting point.  Iceland, Greece and Spain have lost their AAA credit rating and UK is pegged to be the next one to lose it.

The U.K. government may lose its top AAA credit rating after taking a 70 percent stake in RBS, credit-default swaps show. The cost of hedging against losses on British debt rose to a record today and is now the same as protecting against default by RBS, rated two steps lower at Aa2 by Moody’s Investors Service and a further three levels lower at A by S&P. RBS promised to make 6 billion pounds available to U.K. borrowers.

Ambrose Evans-Pritchard, the perennial bearer of financial bad news, notes: England has not defaulted since the Middle Ages. There is a real risk it may do so now.  Jim Rogers, who first predicted the current global financial problems in 2006, states:  I would urge you to sell any sterling you might have.  It’s finished. I hate to say it, but I would not put any money in the U.K.

In 1976 the UK was forced to borrow £2.3bn from IMF after the British pound started to slide in March 1976.  A scenario similar to last several months, where the pound has slid from a high of $2 in summer of 2008, to around $1.35.  More critically, the pound is close to hitting parity against the Euro.  Given that the UK injected £37billion into the banking system last autumn, one has to ask what IMF will be asked to do this time to avert the crisis.  IMF has a $200bn (£117bn) available for countries struggling in the financial crisis but given the expected list of borrowers will that be enough?

The most difficult task facing UK is deflation.

The plight facing Britain is uncannily similar to the 1930s, since prices of many assets —from shares to house prices — are falling at record rates, but the value of the debt against which they are held remains unchanged.

This “debt deflation” is among the most painful of all economic phenomena, since it means the amount families owe increases each year even if they borrow no more.

The Treasury has pledged not to let any British bank go down.   Just RBS has liabilities of £1.8 trillion, three times annual UK government spending and more than the GDP of approximately £1.5 trillion.  What is a government to do?  Invest in riot gear perhaps?

Icelanders all but stormed their Parliament last night. It was the first session of the chamber after what might appear to be an unusually long Christmas break….

Bulgaria has been gripped this month by its worst riots since 1997 when street power helped to topple a Socialist government….

In Latvia …. Last week, in a country where demonstrators usually just sing and then go home, 10,000 people besieged parliament.

Iceland, Bulgaria, Latvia: these are not natural protest cultures. Something is going amiss.

Update:

On Friday (16 January), demonstrators attacked the Lithuanian parliament building in Vilnius with stones, smoke bombs, eggs and ice, breaking windows and calling on the government to resign.

Police dispersed the crowds – estimated to number some 7,000 according to authorities, with tear gas and rubber-tipped bullets – while Prime Minister Andrius Kubilius to hold called an emergency cabinet meeting. A total of 86 individuals were arrested.