ITALY has spoken. Few in the City like what they are hearing, but they should listen carefully. Bond yields, which had fallen when it was thought the centre-left was cruising to victory, shot back up when it emerged that Silvio Berlusconi and a new, populist protest party were doing well.
This bitterly divided vote is not so much against “austerity” – though that is a big part – as it is a general howl of rage at the establishment, at high unemployment and economic failure, at high taxes, at mismanagement and political incompetence, at corruption, at technocratic rule, at Brussels, and at lots of other things. Many of the grievances are, of course, contradictory but it is striking just how few votes the supposedly sainted but now humiliated Mario Monti received, how well Berlusconi – who is hated by the EU establishment – did and the anti-euro comedian Beppe Grillo’s remarkable showing. The majority of voters voted for a Eurosceptic party, something which could well end up blowing the Eurozone crisis up again.
We in Britain have long arrogantly looked down upon Italian politics. But as just about every part of our own establishment becomes discredited by a fresh scandal – the Catholic church; food companies and supermarkets, the latest being Ikea, selling the wrong kind of meat; the NHS; the Liberal Democrats; the BBC; more newspaper journalists being arrested; the City – the public here is as angry as that in Italy. In fact, the Eastleigh by-election is looking increasingly like a modern, continental election, with a three way battle between a failing Tory party, an crisis-struck, damaged Lib Dems and a soaring Ukip. The only missing element is a large communist vote. Voters are fragmenting, party loyalty is breaking down and the only politicians with any resonance are those who sound authentic, such as Boris Johnson.
So here is my advice to the coalition, to Labour and to the City: pay close attention to Italy’s dysfunctional, unpredictable election result: unless something big changes fast, it is the shape of things to come in Britain.
NOT THAT SAFE
IT makes sense that the UK has been downgraded, but why does it still retain such a high rating? In theory, a security’s credit rating reflects the risk that an investor will suffer a nominal loss of interest or principal – in other words, that the issuer will partly or totally default on the promise it made to its investors. Yet in the case of the UK nobody expects this to happen: all of the UK’s debts are in sterling and therefore new money can always be created to meet payments. The debt is safe in nominal, cash terms – but the non-index linked majority of it is extremely unsafe in real terms. The UK government will meet its obligations in a currency that is gradually losing its value; and a real bout of money printing in a crisis and in extremis would be bound to send prices through the roof. Of course, nothing is ever truly safe: a furious public could always force a government to default rather than see inflation rocket to crippling levels, but that remains unlikely.
So as Simon Ward of Henderson puts it, either the debt of countries like the UK should always carry a AAA rating regardless of fiscal trends, as it is safe in nominal terms – or if “investment-grade” were defined as meaning that the yield will more than compensate for future inflation, it is hard to think of any country that would currently qualify. The UK would surely be rated junk – inflation keeps overshooting its target, nobody seems to care and the pound keeps falling. Our current AA rating seems strangely meaningless.
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