to cope with inflation or servicing the nation’s debt, then the UK’s currency and bond markets could come under massive pressure. Investors will demand a higher interest rate to account for the increasing risk inherent from investing in the UK, while the currency could tumble as investors sell gilts to buy less vulnerable more stable nations. At least the UK is financially sovereign. We control our own currency. Sterling may weaken, but we can always print more to repay debt… Except that would probably cause a global run on sterling as confidence in the UK would further tumble. If the currency leg were to fracture, interest rates would have to rise, wobbling confidence further. The Virtuous Sovereign Trinity sounds stable, but experience shows it can quickly turn chaotic if issues are not swiftly addressed. Clearly, the UK has some current confidence “issues” regarding the incumbent political leadership. The growing perception that Boris is a “lame duck” magnifies internationally held concerns about how his government has failed to seize the opportunities (such as they were) from Brexit, doubts about energy and food security, and the apparent dither in policies are all perceived as reasons for sterling weakness and are another reason bond yields are rising as global investors exit. While the UK’s debt quantum should be manageable – Italy is somewhat different. As part of the Euro, Italy is no longer financially sovereign. It has rules on Debt/ GDP to observe (and ignore). But effectively Italy borrows in a collective currency it has no real control over. It has to plead with the ECB for the right to borrow money and will rely on the ECB to announce special measures to make sure its debt costs don’t turn astronomical. Without the ECB, Italy would be heading straight for a debt crisis. That’s why ECB head Christine Lagarde is desperately trying to guide the ECB towards the establishment of antifragmentation policies to stop Italian debt instability leading to a renewed European sovereign debt crisis. Fragmentation means Italian bond spreads widening to Germany – the European sovereign benchmark. It’s a political issue “Key to my approach to markets is that they require political stability to thrive – hence the most remunerative markets tend to be found within the most stable nations.” Finance Monthly. Fron t Cove r Fea t ur e 13
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