Readers of this site will not be surprised that world markets are starting to tell individual governments that they are borrowing too much. If there has been a surprise, it has been the delay before markets wake up and force changes on reluctant administrations. The sloth of markets to say "No" to excess will just ensure that as each country crisis comes it will be bigger and the reckoning heavier, because each country will have borrowed even more.
Iceland, Ireland and the Baltic Republics had their medicine administered sometime ago. They have each been forced into spending cuts, and have to pay more for their loans. Last week the storm surrounded Greece. Yesterday the pressures began to envelop Spain and Portugal.
This is the period of maximum pressure on the Euro. Markets are saying to countries in the Euro who have wandered far away from the discipline of keeping public borrowing down to an annual 3% of their national incomes, they need to cut spending. If they refuse, they need to seek loans and subsidies from the better run members of the Euro area, as the markets are no longer willing to lend to them at German rates.
It turns out they are not part of an integrated money union where all are for one and each is for all. Each Euro member has its own deficit problems, and each has its own credit rating. So it will remain unless and until they each guarantee each other's borrowings and freely transfer cash from the richest to the poorest, from the best run to the worst run, as needed. Germany is understandably reluctant to do that at the best of times. When she is wrestling with her own recession and deficit problems she is unlikely to bail them all out to the extent needed.
The UK would be unwise to think different rules apply to us because the UK is not in the Euro, for one very good reason. It would be foolish of us to say we welcome being out of the Euro to give us the flexibility to borrow to excess, to borrow more than the prisoner members of the Euro, Greece, Portugal, Spain and Ireland. It does not matter whether you are in or out of the Euro when it comes to world market reactions to how much money you can borrow. The UK will not escape the government debt crisis. It has been living on borrowed time for too long. What can happen to Greece, Portugal and Spain today, can easily happen to the UK tomorrow.
Far from enjoying the collapse of the Euro against the dollar and the good questions now being raised over the whole shaky edifice of the single currency, the UK should look to its own problems. The UK has borrowed too much already, and is borrowing far too much going forward.
The Bank "paused" quantitative easing yesterday, to let the bubble in government debt down gently. From here it gets tougher to borrow all the money the government needs. If the UK government does not take the right budgetary action soon, it will be the UK's turn to be tossed around in the world's bond markets. The end of that process is for all of us to have to pay more tax to pay the rising government interest bills as the rates go up. At a certain point, just as happened in Ireland and now in Greece, the government has to cut spending.
We remain of the view that investors should avoid UK government fixed income debt where we expect more bad news ahead. We have also avoided country based share investment in the major developed economies, which are now suffering from the backwash of this rolling government debt crisis. It is a time for balanced and cautious investment. As we feared, this year is likely to produce much lower returns than 2009 as the long aftermath of the banking crisis is compounded by the government borrowing crises now becoming the main topic of market conversation.