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Britain risks ratings
Markets continue to send “signals of turmoil”
Europe remains the main source of investor concern and falling asset prices. Yesterday, the Fitch rating agency increased concerns about the spread of the European debt crisis. The agency's experts drew attention to the UK's budget deficit and the "unobvious measures" of the new government of this country. The British pound sterling fell by 0.4% yesterday, to $1.44. By mid-day, European indices fell by about 1.5%. The Russian RTS index closed down 1.9%.David Cameron's government, which came to power in May, has already announced £6 billion, or €7.3 billion, of spending cuts it will take this year. A detailed budget savings plan is due to be announced on June 22. As Mr. Cameron said yesterday, every person in the country will feel the impact of large-scale spending cuts for many years. The volume of UK public debt in the financial year that ended on March 31, 2009-2010 reached a record level in post-war history - 152.8 billion pounds. This year it is forecast to be £157 billion. The budget deficit exceeds 11% of GDP. Domestic public debt, as of the end of April, rose to its maximum value of 893.4 billion pounds (62.1% of GDP).
As Fitch Ratings notes, the British government faces a huge challenge to reduce the budget deficit faster than the previous Labor government planned. Fitch acknowledges that the Conservative-Liberal Democrat coalition government has responded immediately to the country's fiscal problems, but it is not clear from the new government's current statements whether it will be able to accept lower budget deficit targets over the medium term. The British credit rating remains at its highest level - AAA. However, according to Fitch, since 2008, the country's public debt has been growing faster than that of other countries with the same rating.
“This information does not create a very good atmosphere for investors in the stock market. Prices will continue to fall. We are revising our earnings forecasts downwards. This is the start of a bear market,” noted economist Dennis Hartman told Bloomberg. "There are ongoing signals of turmoil in the financial markets, and this is now reflected in investors actively buying gold as a reliable asset that can protect against risks," Spread Co.'s chief trader told AFP. Rajesh Patel.
Statements by Fed Chairman Ben Bernanke added optimism to investors. In his opinion, the US economy is not in danger of a second wave of the crisis. "Spending by ordinary consumers and businesses is supporting the positive development of the economy, with the private sector taking the baton from the government's extraordinary stimulus measures," Mr. Bernanke said, adding that the world's largest economy is recovering moderately but unemployment remains high. In addition, according to Mr. Bernanke, "investors are not entirely confident that the problems have already been overcome."
At the beginning of trading, the main US indices managed to overcome the negative and rose by approximately 0.5%. "Bernanke helped the market by communicating that he still sees economic expansion and is not forecasting a second wave of recession," said a portfolio manager at Gamco Investors Inc. Howard Ward. “The market must appreciate this.”
As noted in a Eurogroup press release issued yesterday, EU finance ministers agreed on the details of a stabilization fund being created in the region, part of which will be secured by guarantees from eurozone countries totaling 440 billion euros. Following a meeting in Luxembourg, eurozone financial leaders decided that the European Financial Stability Fund would sell bonds backed by these guarantees, and the proceeds would be used to provide loans to eurozone countries in dire straits. Finance ministers expect the fund's instruments to be rated AAA and its bonds to be used as collateral in refinancing operations carried out by the European Central Bank. To ensure a high debt rating, the share of guarantees for each bond issue for each country participating in the fund will be 120%. The fund's governing board will consist of representatives of eurozone governments, and the fund's executive director will soon be appointed. On June 2, European Commissioner for Monetary Policy Olli Rehn said: “If any country has to use the European Financial Stability Mechanism, it will be on the same principles as we are currently working with Greece.”
However, many market participants are skeptical about the effectiveness of the European fund. "Europe's €750 billion crisis relief package may not be enough to save the monetary union, and we face a prolonged period of market stress and uncertainty," the Royal Bank of Scotland Group said in a report.