Bond markets, not politicians, control our future

| 29th April 2010
Dan Box
We've lost control of our spending and debt to international bond markets and whoever wins the election won't be able to take it back

'I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.'
- James Carville, advisor to President Clinton, quoted by Bloomberg

Next year, according to the latest budget, more than £1 in every £4 the Government spends will be borrowed. This means that, after the election, the most powerful force in UK politics will be none of the political parties - it will be the international bond markets that lend the money keeping the country afloat.

The bond markets are where governments go to borrow money, promising to pay it back plus a regular extra 'yield' payment to the lender. If the markets think they are taking a risk lending the money in the first place, they charge a higher yield. This gives bond traders a vast and largely misunderstood power, which is how they like it.

It works like this. If bond traders decide a country cannot manage its own finances they can demand a higher yield – as happened this week when the ratings agency Standard & Poor's downgraded Greece and Portugal's credit ratings, the former to 'junk' status.

Do this to the UK and our debt repayments will be harder to meet, until we end up borrowing billions not to spend on hospitals and schools, but to repay the money we have already borrowed.

All any government can do is make sure it always meets its repayments, which means spending less elsewhere. The Institute of Fiscal Studies suggests the Libs, Labs and Tories are all failing to 'fess up to the cuts they know will be necessary after the election. As someone who doesn't like being lied to, this bothers me, but it doesn't bother the market; the fund managers I’ve spoken to said they didn’t mind who wins on May 6 because the cuts will happen anyway.

The newts will lose

Why does this matter to you, Ecologist reader? Because if you are a new government wielding the scalpel, the environment is an easy place to make a cut. Few people care about newts the way they care about hospitals and schools. Both local and national conservation charities – heavily reliant on grant funding – are already face uncertain times, with many already cutting budgets, cutting staff and, in one case, selling their own headquarters to keep the cash flow flowing.

Big, green businesses are also being blown off course. Take Engyco, one of five green companies whose fortunes I'm following in The Ecologist Stock-Picking Smack-Down™. A smart renewables utility that hopes to build a £1 billion utility business through investment in the Spanish solar industry, Engyco's plans to float the company in London were beset by fears the Spanish government would cut solar subsidies as its wider economy suffers. T-Solar, Spain's biggest solar producer, has just delayed its own flotation for the same reason.

Engyco now expects to weather the storm, and for the sake of the Smack-Down I hope they do. But further squalls could be provoked if the ratings agencies, including Standard & Poor's, cast their gaze over Spain's finances and don't like what they see.

Update: Things are getting ugly in the bond market. Moments after I filed the above to my editor, Standard & Poor’s announced it had downgraded Spain’s credit rating, because it believes the economy will suffer 'a more protracted period of sluggish growth than previously expected'. I doubt many people, including the Spanish government and many at Engyco, know how this will play out…

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