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PIMCO Sees UK Rating Downgrade Probability At 80%, Gilts Higher By 100 Bps
The end of QE will be a big problem in the US. Yet what happens in the UK, where the BOE is openly monetizing, once their free liquidity ends, could be a watershed event. Couple this with the likelihood of a downgrade, and the UK's fiscal and monetary future in 2010 is looking quite shaky. Today PIMCO's Scott Mather told Dow Jones his expectation for a rating downgrade of the island nation: "It's just a question of when on the current trajectory, not if. Based on what we know today about the debt trajectory and about the
inability to adjust that, I think it's greater than a 50% likelihood for sure.
Call it more like 80%." And according to Mather, rates on gilts will shoot up by 100 bps once the bond-buying program ends. It is amusing that the fiscal health of the developed world now hinges on the amount of ink cartridge accessible by the two main central banks.
PIMCO, which has recently made waves after Paul McCulley said he is a strong to quite strong buyer of pretty much nothing, has become quite the bond bear. More from Mather via Dow Jones:
"Common sense would tell you that if you had a buyer in the market place which was taking the majority of the sector repeatedly... and then they disappeared, ...you would expect a reprising, and it could be quite significant," he said in a telephone interview.
"The estimates vary. They're really all over the map, but it could be 50 basis points, it could be 100 basis points, in that range."
It is unfortunate for the Brits, that unlike their transatlantic descendants, the pound does not share quite the "reserve" reputation of the greenback, implying that their ability to print their way out of the crisis is much more limited.
And speaking of Britain, an interesting line of thought brought by Mark Kleinman's SkyNews blog highlights that even as City bankers are leaving in droves for Switzerland, none other than Goldman Sachs has found a loophole to make sure its employees do not suffer the recently adopted increased banker bonus tax.
Goldman Sachs, the US investment bank, is moving towards a decision
that rather than passing the cost of the tax onto employees by
absorbing it within the year-end bonus pool (which would automatically
mean paying out less money to staff), it will instead gross up its
bonus pool so that the bank pays the cost of the tax itself. So, for
example (and these numbers are for illustrative purposes only), if
Goldman is liable for a £400m tax bill on a UK bonus pool of £1bn, the
bank will simply allocate £1.4bn rather than £1bn to bonuses for
UK-based staff.
On the face of it, that would mean that Goldman
bankers based in London will not feel the impact of the bonus tax when
bonuses are awarded over the next few weeks - which would be a
potentially controversial decision given that Goldman is viewed in
political circles both in Britain and in the US as the flag-bearer for
Wall Street's racy bonus culture.
Institutions can choose between bearing the cost of it themselves
(which could mean shareholders missing out in the form of lower
dividends if the money comes out of the dividend pot), or passing it on
to their employees (either by singling out UK-based staff or spreading
it across the global employee base in the form of lower bonuses).
Of
course, they could also choose a combination of the two approaches -
something that I expect Barclays to do in the coming weeks (see my note
of a couple of weeks ago). Or they could simply slash their bonuses for
one year - which looks like it is unlikely to happen on an
industry-wide basis, meaning that the Treasury will reap many times the
£550m it had bargained for from the tax.
Goldman is the first of
the major investment banks operating in the City to decide that it will
bear the full cost of the tax itself.
I don't yet have concrete
guidance about the size of the Goldman tax bill (it's still being
worked out by the bank), but given the Wall Street titan's
profitability during the 2009 financial year and the amount of money it
has already set aside for staff compensation, it's unthinkable that it
will be less than several hundred million pounds.
The take home here is that being a defacto monopolist in every market one participates in provides huge economies of scale...and paydays. Who knew... And even as other, less "fortunate" banks are unable to bear the full tax cost are forced out, Goldman will once again benefit by becoming a dominant player in yet another critical market. Well played oh acolytes of the lord.
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Mervyn King will let it happen - he's no fan of The Son of the Manse and will delight in seeing him squirm. After all, he's got his seat on the BIS board to fall back on anyway.
It would be convenient for the UK to be the Black Swan that initiates the crash - then the Boys can point over the water and say "It's their fault!"
Say what? Pimco? Long UK sovereign debt!!!!!!!!!!!
Are you joking, or this actually Jim Cramer?
It's just Leo, who thinks he's smarter than
everyone else.
My question is if a UK downgrade might be able to spark a selloff in HY issues around the world. I'm inclined to think not since the UK as a country is not TBTF. I guess we will see in due time, but if the UK can be downgraded with absolutely no spillover effects to broader global markets then it would really make me wonder just how big a shock and systemic failure would be a sufficient condition to push the world back to deflation.
mate, you are dreaming...UK default with no spillover effect???
A UK default would certainly have spillover effects, but a downgrade could easily be another in a long string of "meh" moments.
Heh, mate...
I'm not your friend buddy
I'm not your buddy guy
I'm not your guy friend
I'm not your friend buddy
http://www.youtube.com/watch?v=-5uzJVkeaUI
QE has no end, just different names.
Motorcycle, as we used to say.
This is just the PINNACLE of absurdity!
We are talking about the price of bonds in a state that is BANKRUPT and how printing money to "buy" them is keeping their price down.
Well, shit, if stopping QE is going to cause a bond downgrade and eventual insolvency, WHY STOP IT?
And if you cannot stop default without PRINTING money, then you are already fuckin insolvent!
As for GS and the City...good lord, haven't people figured out that inflation is very, very, very^35 good for the rich??? GS will happily pay this tribute because there are precious few places out there with the type of insane inflationary policies that make the directors of companies like GS filthy rich.
Let them GO to Switzerland...haven't jews figured out yet that Switz is no safe haven???
The world is going to tire of usury as interest service strangles the life out of the real economy. I would not want to be a member of a group historically associated with banking and usury when that time comes.
Who thinks the Brits are going to stop pumping money? Just sit back and watch everything implode because of a possible downgrade? Hilarious.
That time is
*checks watch*
about right now.
-MobBarley
I wish you would make up your mind. First its peak oil, now the Jews. THE jews.
Or maybe the JEWS planned peak oil! Of course, now I see it. Those clever, foreskinless bastards! Developing Marxism so that China can rebuild its economy and start consuming oil at a stratospherically level. The genius of the Hebs is truly nefarious -- to lie in wait for hundreds of years to strike the West down! Even tricking us with this Holocaust business!
The irony here is of course that politicians sought to disincentivize bad behavior via taxation, and completely missed the point of addressing the compensation structure of these major firms (of which I am a former employee). The elegant, simple, Occum's razor solution was simply allowing them to eat the downside of their decisions and fail in the market (hopefully in an organized bankruptcy where creditors as well as shareholders eat shitcake while counterparties are backed in to prevent Lehman), thereby raising their cost of capital meaning shareholders and creditors will actually press for comp reform (insist on it actually) and simultaneously 'compensating' their employees with unemployment (temporarily). Instead, they taxed. And who's paying that tax? Why, the shareholders of the company. So how exactly is this supposed to change compensation behavior at major TBTF investment banks again? Unbelievable.
If you're out there RobotTrader, you'll probably want to include this in your daily update:
"Source: Michelle Caruso-Cabrera Dumped Alec Baldwin For Being A Fat Doofus"
http://www.businessinsider.com/source-michelle-caruso-cabrera-dumped-ale...
They're both doofuses....
Interesting timing: Iceland's President vetoes Icesave bailout-induced debt slavery for citizens, decides to let voters decide on whether to bail out Icesave accounts.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aV0GNyDpsP.E&pos=6
Iceland to Hold Referendum on Icesave After Veto (Update2)
The Icelanders have agreed to pay back the money - they passed a law a few months ago to that effect - but they refuse to pay it back at 5.5% interest, which would equate to circa 40% of their GDP. Good for them, I say.
Americans have no national referendum vehicle, other than perhaps revolution - or is that wrong? Perhaps a 3rd party emerges. I doubt it for 2010 unless it gets shitty real quick.
Makes me think that could be why .gov have decided to shoot debt up into the stratos - as a way to insure payment should the people get uppity.
Its just pinin for the fjords!
"Goldman is the first of the major investment banks operating in the City to decide that it will bear the full cost of the tax itself."
It's not paying it "itself". It's a typical owner-manager priority discrepancy where they steal the owner fucking blind so they can get their shitty bonuses. Or horror of horrors, they'll just give themselves options and dilute the owners.
What a bunch of jerks.
Totally agree here. Selling JGB's may be the hedge fund trader's 'Holy Grail', but given the fiscal state of Britain, selling Gilts is the financial equivalent to shooting fish in a barrel.
Ironically, given how dependent the London/British economy is on the financial sector, GS leading the way towards every major investment bank bearing the full cost of the tax would be the only saving grace for Sterling/Gilts.
" Totally agree here. Selling JGB's may be the hedge fund trader's 'Holy Grail', but given the fiscal state of Britain, selling Gilts is the financial equivalent to shooting fish in a barrel."
+1
"The end of QE will be a big problem in the US."...
Which is why it won't.
The Treasury and the Fed will get a brief wake up call post tax time this year, when the tax receipts on dividends and fixed income from investors look like a mistake on the ledger because they are so miniscule. They will have a brief nausea moment there, when they see more clearly how they have obliterated the entire concept of saving money.
But, after some more thought, they will continue to do nothing, leave rates at zero, and continue with QE2, already drafting plans for 3 and 4.
There is no exit strategy.
Credit.Must.Grow.
There is no other way.
Fractional BS and synthetic debt allowed them to run this thing almost a decade after it would have already collapsed on its own. It's tried to already 3 times in the past 10 years...hasn't anyone noticed?
The real economy ran out of steam and the synthetic one took over the baton of credit growth. And they piled leverage atop leverage, constructing CDOs even of tranches of other CDOs. Yeah, supersenior tranches of CDOs composed of equity tranches of other CDOs, synthetic CDOs based upon the payment streams from CDSs, themselves tranched, and then squared up again, with leverage built right into the instrument.
Again, rice...chessboard. You have to double the shit each square, that's the rule. So $40T in credit outstanding must become $80T, then $160T, then $320T.
What, nobody understands e?
the britts still make great movies, janks not any more
is there an emma thompson in the obamaland?
it's time to ask the question and to start circulating in the news media: why arent goldman, AIG, and Morgan stanley forced to break up into pieces?
race baiting commentary reduces the credibility of the site
please try to refrain from revealing your tribal biases
the moderator should not allo any references by idiots to blaming a certain race or culture for our problems
We are ALL COMPLICIT
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HolyGrailToInvesting@hotmail.com
C'mon, the UK has faced difficult times before and got through them okay. Don't panic.