Morgan Stanley: The U.K. is not okay.
Morgan Stanley warns UK risks full-blown debt crisis
By: Grainne Gilmore
The UK risks being the first G10 country to have a full-blown debt crisis, leading economists said last night, as it emerged that the country is now the only G20 nation still in recession.
Economists from Morgan Stanley said that if next year’s elections resulted in a hung Parliament, the country could face losing its AAA debt rating as investors panicked over whether the majority party had the authority to push through the fiscal tightening needed to get the UK’s finances back on track.
“In an extreme situation, a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in government bonds,” the Morgan Stanley economic report, written by Ronan Carr, Teun Draaisma, and Graham Secker, said.
Such a scenario could lead to a sharp rise in interest rates - further undermining the economic recovery.
But the economists also pointed out that such a doom-laden scenario could be good news for investors as the FTSE has a relatively low exposure to the domestic economy.
“UK equities may be a net beneficiary of such a scenario,” the report said.
Morgan Stanley’s prediction came as Canada said its economy had 0.4 per cent annualised growth in the third quarter, leaving the UK as the only G20 country not to have emerged from recession in the third quarter.
Official figures published last week showed that while the economy’s third quarter performance was revised up marginally, the country still remained mired in the downturn, with economic output falling by 0.3 per cent between July and September.
This will be seen as an embarrassing development for the Government as the Chancellor gears up for next week’s Pre-Budget Report.
Shadow Chancellor George Osborne said: “Gordon Brown used to boast about leading the G20 but it is now official that Britain is the only G20 country still in recession.
“Labour’s disastrous economic policies meant Britain was one of the first into recession and now we are the last out.”