views

No bailout for Greek debt investors

Allister Heath
INVESTORS should have seen the sub-prime crisis coming. Yes, I know, it’s easy to say that with the benefit of hindsight, though a fair few economists and investors actually did get it right, not least the doctor turned hedge fund manager Michael Burry, who is brilliantly depicted in Michel Lewis’ new book, The Big Short.

But while years of cheap central bank money meant that there might have been an excuse for stupidity, delusion and short-sightedness last time around, nobody can honestly claim that they were not warned this time. Everybody by now ought to be aware that government bonds are the new subprime – and if they don’t see this, they should quit the financial services industry. Contrary to what textbooks say, government bonds can be risky – and states often default, not merely via inflation but also by not paying back what they owe.

Greece is spiraling out of control and other sovereign borrowers – such as Portugal or perhaps California – could be next. The surge in Greek government bond yields over the past three days and the rise in the cost of using credit default swaps is merely a harbinger of far worse things to come. Prospects for the eurozone as a whole are looking worse in 2010 than those for the UK, which will further hit public finances. Capital Economics is predicting eurozone GDP will grow by one per cent this year and only 0.5 per cent in 2011.

So when the bubble does finally pop, when countries start to renegotiate loans and creditors are forced to take massive haircuts, nobody should come whining for subsidies, begging bowl in hand. Taxpayers simply won’t have it.

TAX WARS GALORE
The Tories need to beware: they are now the only party not to have fully and explicitly ruled out a hike in Vat after the election (they say they have no plans to put the tax up, but that isn’t quite the same thing). The Liberal Democrats have been quick to put out a vicious attack poster campaign claiming that a looming Tory Vat increase will cost everybody £389 a year. This is demagogic nonsense, as is their factually incorrect line that the only people who would get a tax break under the Tories are millionaires.

This is simply not true. But there is only one sensible way forward. The Tories should go the whole hog and pledge not to put up Vat at all after the election – and if that means that all of the necessary fiscal tightening comes from reductions in expenditure, then so much the better. The tax burden is much too large already.

The alternative – to refuse to rule out higher Vat and thus to be depicted as the high-tax party – would be disastrous for the Tories and could cost them the election. At the same time, the Labour argument in support of Gordon Brown’s economically illiterate increase in national insurance has subtly shifted: they are now dismissing the Tories’ war on waste (intended to pay for their tax cut) as worthless “back of the envelope” economics. Cameron was good yesterday highlighting Brown’s inconsistencies when it comes to the aforesaid government waste – but he must urgently come up with a much more detailed waste cutting plan if he is to assuage the doubters. Everybody knows the government wastes vast amounts of taxpayers’ money – but for a politician to convince a cynical electorate that they will actually do something about it is another matter entirely.

allister.heath@cityam.com