TELEGRAPH: Basket case Britain must rebuild its credibility

[El Pinko]

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/02/18/ccview118.xml


Basket case Britain must rebuild its credibility

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 6:54am GMT 18/02/2008

Britons cling to a comforting notion that overpopulated islands with a shortage of land can never suffer a sharp fall in house prices. Such illusions are often at the root of the most extreme asset bubbles.

Some of the most spectacular property crashes over the last 60 years occurred in the Pacific rim islands during the 1990s. Tokyo land prices fell 80pc in Japan's deflation. Property prices fell 63% in Hong Kong, and 56% in Taiwan. Each is a more crowded island than Britain. In each, the bust followed rampant misuse of debt leverage. Closer to home, we see a crunch in Ireland. Dublin property prices fell roughly 10% in 2007. A study by Trinity College Dublin said values may halve before the excesses of the credit boom are fully purged.

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Indictment One: the UK current account deficit reached 5.7% of GDP in the third quarter of last year, the worst of any major country in the world, bar Spain. "This is approaching Banana Republic status," said Albert Edwards from Société Générale. "Years of macro-mismanagement have dragged the UK economy to the edge of a precipice. The household sector is borrowing at a cyclically unprecedented 4% of GDP. Basing economic growth on unsustainable asset price bubbles was always a recipe for disaster," he said.

Indictment Two: we are a budget basket case as well, with a deficit of 3% of GDP at the top the cycle. We enter slump without a fiscal shield. Even America is doing better. This deficit is beyond the legal limit of the Maastricht Treaty, not that Downing Street cares. Gordon Brown may have to care more about the bond vigilantes and currency traders who have sharper claws.