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Top 10 at 10: Britain's rating threatened; Massive US bond issues; Arnie's woes; HBoS pullout?

Top 10 at 10: Britain's rating threatened; Massive US bond issues; Arnie's woes; HBoS pullout?

Here's my Top 10 links at 10 am. I welcome your additions in the comments below. Dilbert is on a run with the MBA theme. Again, some of my best friends have MBAs...and if I had one I'd be a much richer man... 1. Standard and Poor's has warned Britain it may downgrade its AAA credit rating because the government's debt is headed for 100% without too many signs it is under control, the reports. The British government's deficit is set to hit 13% of GDP in 2010. Here's the FT's view.

S&P's move sets a precedent for other big economies with triple-A ratings whose their debt burdens are also approaching 100 per cent of national income. The UK debt burden is forecast over coming years to be similar to that of the United States, France and Germany, all of which may now be vulnerable to an S&P downgrade.

Here's the full statement from S&P. And an excerpt.

Our projections also incorporate updated estimates of the cumulative potential gross fiscal cost of government support to the banking system, which we now estimate to be in the range of £100 billion-£145 billion, or 7%"“10% of 2009 estimated GDP. Taken together, these factors could, in our opinion, result in a doubling of the general government debt burden to nearly 100% of GDP by 2013. A government debt burden of that level, if sustained, would in Standard & Poor's view be incompatible with a 'AAA' rating.

2. Bond guru Bill Gross at global bond behemoth Pimco told Reuters that fears about a US credit rating downgrade were driving the market down. 3. Felix Salmon at Reuters reckons the debate about S&P credit ratings is irrelevant because no one trusts S&P anymore and US Treasuries are just plain better than anything else.

The most important thing to remember here, however, is that ratings agencies don't matter any more. They lost their credibility when structured finance blew up, and the number of people buying Treasuries because S&P says that they're triple-A rated is exactly zero. There are lots of triple-A rated securities; people buy Treasuries because they're liquid. The US triple-A may or may not disappear at some point, but if and when that happens it'll be a lagging indicator, and there will already be a select group of alternative securities which are trading at lower yields in dollars. So long as Treasuries have the lowest yields in the dollar-denominated world, they will retain their triple-A, and there are much more important things to worry about.

4. The US Treasury announced plans to issue US$101 billion of bonds in the next week and Goldman Sachs is estimating the US Government will borrow US$3.25 trillion in the fiscal year to the end of September, Bloomberg reported. That's over 20% of GDP in one year. The markets are starting to get indigestion with all this debt and longer Treasury bond yields rose when the Federal Reserve announced it only planned to buy back US$7.4 billion or 16% of the bonds offered. This does not compute for the bond markets. Here's an excerpt from Bloomberg.

"With the supply this market is facing, it has to go to higher yields to attract capital," said Charles Comiskey, head of U.S. Treasury trading in New York at HSBC Securities USA Inc., another primary dealer. Treasuries have fallen 3.3 percent this year, according to Merrill Lynch & Co.'s U.S. Treasury Master Index, as President Barack Obama borrows record amounts to try to snap the deepest recession in at least 50 years and service budget deficits. Obama's administration has pushed the nation's marketable debt to an unprecedented $6.36 trillion. His administration raised on May 11 its estimate for the deficit this year to a record $1.84 trillion, up 5 percent from the February estimate, and to $1.26 trillion next year, up 7.4 percent. The difference between rates on 10-year notes and Treasury Inflation Protected securities, which reflects the outlook among traders for consumer prices, reached 1.73 percentage points, the highest level since September.

There we have it. The bond market's inflation expectations are the highest they've been since the market collapse in September. Longer term interest rates are rising globally because governments are borrowing too much and central banks (luckily not ours...yet) are printing too much. 5. US stocks fell as much as 3% during late trade before a mini-recovery helped it close down just 1.5%. Fears about the potential downgrade for Britain and what it might mean for America's own AAA rating predominated, the reported. The US Federal Reserve's failure to buy back enough bonds was a factor too.

"The market started going down right after that announcement," said Arthur Bass, a Treasury-futures trader at Newedge USA. "We've got so much supply coming online here, and if they're not going to take a good chunk of it, that's a big negative for this market."

6. The Independent is reporting that Gateway to Queensland, the biggest seller of Queensland investment property in New Zealand, faces an application for it to be liquidated. It has been a heavy advertiser on radio in New Zealand. 7. Another big US bank, BankUnited, has gone under. This is the biggest so far in 2009, says Tyler Durden at ZeroHedge. 8. Even the now discredited Alan Greenspan reckons the green shootists are wrong, Bloomberg reports.

"There is still a very large unfunded capital requirement in the commercial banking system in the United States and that's got to be funded," Greenspan said in an interview yesterday in Washington. He also said that "until the price of homes flattens out we still have a very serious potential mortgage crisis." Greenspan's comments suggest he sees a bigger capital shortfall in the banking system than reflected in regulators' stress tests on the 19 biggest U.S. lenders. Treasury Secretary Timothy Geithner told lawmakers yesterday that banks have issued more than $56 billion in new stock or debt since the tests found 10 firms needed to raise about $75 billion. A lack of capital at banks may inhibit lending to consumers and businesses, tempering any economic recovery. The former Fed chief, who left the central bank in 2006, said that the continued slump in home prices is putting at risk millions of borrowers. "We're on the edge and if this thing doesn't get resolved quickly I'm worried," he said before a meeting with House of Representatives members on financial regulation that was organized by the Washington-based Bipartisan Policy Center.

9. The explains why California is in such a fiscal mess. Poor old Arnie.

Part of the fault lies with Arnold Schwarzenegger, brought to power by popular disgust with dysfunctional government. Despite early successes, the swashbuckling former film star has not fulfilled his mandate for reform. Even more to blame are the intransigent special interests he has failed to win over. But ultimately it is Californian voters who have fallen short. The state's direct democracy gives them influence "“ and responsibility; but they voted only to ban pay rises for lawmakers. If they think they can escape belt-tightening of their own, they are dreaming. When they wake up, it will be to a nightmare.

10. It looks like the European Commission is going to order the UK Government to force Lloyds HBOS to reduce the size of its balance sheet as a condition for allowing state support, reports. This could have some fallout here if it reduces its lending outside the UK. BOS International was a heavy lender to the property and finance company market here (Strategic and Geneva) and both RBOS and HBoS are the big lenders behind the Ironbridge ownership of Mediaworks (TV3/Radio Live etc).

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