The return of the bond vigilantes
Dernière mise à jour : 21 oct.
If we look at the data, UK misfortune is somewhat puzzling. Let’s assume that the Kwarteng’s mini budget amounted to an additional deficit (energy subsidy plus tax cuts) amounting to about £70 bn or 2.5% of the 2023 UK GDP. This additional fiscal deficit may raise the total UK fiscal deficit to a maximum of about 4.8% of GDP. This is an amount equivalent to the 2022 fiscal deficit. These are my projections (I would be glad if you propose me better). This new expected deficit put the country’s finance (exchange rate, gilt yield in a tailspin). Now that QE is ending the bond vigilantes are back.
Now let’s compare the UK public finance with France. If we look at the IMF projection for France (IMF/WEO/Oct 2022) the IMF projects for 2023, a fiscal deficit amounting to 5.6% of GDP, IMF projections are often optimistic, the ex-post fiscal deficit will very likely be higher. Have you heard of any attack of the market against the French public debt? The French public debt ratio 2022 (112% of GDP* always optimistic IMF projection, UK public debt ratio 87%*). Obviously, the market is nicer to a country like France than to the UK.
Some suggestions of explanation:
1) The euro shield masks the poor performance of some of its members.
2) The ECB is fudging the rules, discreetly buying the bonds of lax countries (targeted QE). The difference between the ECB and the BoE, nobody knows clearly what the first is doing.
3) “Investors are primarily watching other investors rather than judging the fundamentals for themselves” L. Summers, the FT Oct. 6, 2022.
4) Political stability is a precondition for market credibility (the French Gaullist constitution provides this stability).
Now will this dramatic situation limited to the UK? Will the bond vigilantes stop in London or will they go for a stroll through Rome, Athens, Paris, nice places too? In my view, all depend upon the role of the ECB, if the ECB stops QE, the bond vigilantes will come back with a vengeance.
*Note: The OECD and IMF statistics on the general government debt ratio are very different. For the IMF (WEO) le UK GG debt ratio amounted to 95% of GDP (end 2021) and for the OECD 143%! (2021 is the latest statistic given by the OECD). A difference of 48 % of GDP for the same year, for the same concept, for the same country changes the analysis completely.
Same thing for France Public debt ratio IMF 113% of GDP (2021), OECD 138%.
What is the difference of the concept between the public debt ratio of the OECD and the IMF? Given the importance of the debt ratio, for debt sustainability, a more homogenous concept between these two important international organizations would be useful.