Brian Monteith: Chocolate coins prove a safer bet

Published on Friday 1 May 2009 09:42

WOULD it not be a very strange world if we were to find that our moon was made of cheese? Blue cheese maybe, Gorgonzola hopefully, but cheese all the same.

Well, you might find this hard to believe but something rather similar has just happened. The moon might not yet be made of cheese but our money has turned to chocolate, and not even the best chocolate at that.

I happened to be scanning the newspapers to see what the reaction to last week's Budget was and came across a most interesting report in the Financial Times that I thought readers of the Evening News should know about. It combined both a comical absurdity that appealed to me with a powerful illustration of just how dangerous this country's problems now are. Let me explain.

In the financial markets, it is always prudent to insure against the risk of a deal failing. With such large sums as millions and billions involved, it makes sense to spend thousands to cover any loss.

When governments want to fund their borrowing, the loan is sold as bonds in the gilt market. The purchasers, mostly international investors looking for a predictable and secure return – pension funds, for instance – can and do insure against the possibility that the government selling the debt (taking the loan) defaults when repayment is due. This insurance cover is not just restricted to government borrowing but to corporate debt taken out by international companies.

Such is the concern in the international markets about the reliability and performance of Gordon Brown's Government that in the last few months the cost of insuring against the UK Government defaulting on its debt repayments became higher than the cost of insuring against some of the best-known international corporations – one of those being British chocolate manufacturer Cadbury's.

Last week, the cost of insuring on a 10 billion, five-year Government loan was 95,000 per year (last summer, it was only 18,000), while insuring on Cadbury's for the same amount would cost 50,000 per year.

The absurd reality is that, as far as the market sees it, the UK Treasury's money is now worth less than Cadbury's. We might as well have chocolate coins rather than the real thing.

The market is not some monolithic institution that thinks by itself with one mind, it is the result of spontaneous decisions by an almost infinite number of analysts, investors, buyers and sellers. As can be seen by the rise in the cost of risk, the market mood has become far, far more pessimistic about the Government's ability to ride the storm that it took us into.

Why is this? Well, it comes back to what I wrote about last week, the Government is losing the confidence of the majority of people making investment decisions in the markets, often on our behalf. There comes a tipping point, not yet reached, when the flow of statistics leaves Government ministers completely naked, with nothing left to cover them.

No sooner had Alistair Darling sat down after putting a brave, optimistic face on the nation's ability to recover when his own Office of National Statistics published information that said matters were far worse. This is why the markets are turning against the Government.

Alistair Darling may be right, of course. We may bounce back in a manner that has not been seen before. If he's wrong, however, it looks very bad indeed. Darling says the ratio of Government debt to the country's gross domestic product will reach 76 per cent by 2013, but that's based upon his optimistic forecasting.

This week, in a Commons committee, one of the Chancellor's chief advisers said one of the assumptions that they based a quick economic recovery on was that the reintroduction of the old VAT rate in December would spur consumers to buy before the tax rate goes up. How daft is that? Desperate for business, I predict retailers will swallow the meagre 2.5 per cent tax hike in an effort to win a sale – consumers will have no greater incentive to spend than now – and anyway, they may have decided that consumption for the sake of it is ruinous. They might just want to save instead!

If this is the quality of the advice the Chancellor is taking, I fear even more for our future. This is what the market appears to be thinking, too.

The people that give governments and companies their credit rating (just like we are given such ratings, too) have confirmed they are monitoring the UK's performance and would have to remove the triple-A rating if the debt ratio and other similar factors worsen. Such an outcome would require the International Monetary Fund to bail the country out – as it did with Hungary only a few months ago.

We truly are living in an unreal world, like some Lewis Carroll work of nonsense where the Chancellor, dressed as a poodle, is walking a tightrope and chocolate money is the coinage. We can now only pray Captain Brown has not taken us to sea in a sieve.