Mecklai: Is UK staring at triple-dip recession in 5 yrs?

Mecklai graph of the day: Cost of protection

In an unpredictable global environment, dark cloud looms over UK as it is staring at triple–dip recession in five years. Credit-default swaps insuring gilts rose 76 percent from a more than four-year low of 26 basis points on Nov. 1 for Gilts having tenor of 5 years. The swaps cost 10 basis points more than contracts on German bunds, the 17- nation euro-area’s benchmark debt securities, compared with 34.5 basis points less in June. Rising swap prices signal a deterioration in trader sentiments and it’s now more expensive to insure debt of UK than that of Finland, Denmark, and Germany.

The debt owed by UK was once considered to be the safest among AAA rated nations against the backdrop of euro crisis and increased pressure on Germany to help ailing countries to stay afloat. However, soon the tables turned when ECB vowed to do whatever it takes to protect single currency while UK started falling apart under the burden of a string of weaker economic data. Situation worsened when Moody’s downgraded UK’s credit rating to Aa1 from Aaa, thereby throwing a daunting task at policymakers to maintain the fiscal consolidation. Besides, sterling depreciated 6 percent this year against dollar thus adding fuel to the fire. Despite this, it was surprising to see BOE refraining from providing stimulus to bolster growth recently, and now questions have been raised over the leadership of UK. With fall in exports and GDP shrinking to 0.3 percent, it would mark the beginning of start of third recession in UK and further worsening of the economy would only increase the cost of insuring the government debt in the coming days.

Below graph shows CDS of 5 Yr bonds of UK, Germany, Finland and Denmark since December 2012.

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