14 February 2012UK Economics and Strategy
Exhibit 3: UK public sector net borrowing Exhibit 4: UK composite PMI
£bn, 12m rolling sum
-200204060801001201401601997 1999 2001 2003 2005 2007 2009 2011-20020406080100120140160DeficitSurplus384042444648505254565860621997 1999 2001 2003 2005 2007 2009 201138404244464850525456586062
Source: Credit Suisse, Thomson Reuters Datastream Source: Markit, Credit Suisse
All the same, this switch to a negative outlook is likely to increase international investors’focus on the UK. There may be some sensitivity here that foreign investors have been thedominant marginal buyers of gilts (absent the Bank of England) in the last couple of years.In flow terms, that can be seen in Exhibit 9. However, the two charts below show that inthe last few years, the share of the gilt market held by foreign investors has risenconsiderably. That investor base may be unduly sensitive to ratings downgrades.
Exhibit 5: Holdings of gilts (ex BoE), December 2008 Exhibit 6: Holdings of gilts (ex BoE), December 2011
Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse
Finally, it is worth asking whether and where this really matters. The Bank of England’s QEprogramme has led markets to deduce that the central bank provides a significantbackstop to the sovereign. And, in our view, the probability of a gilt investor ever not beingpaid back in full, in sterling, is extremely low. Having its own currency and central bankhas effectively insulated the UK sovereign from the risks and concerns that are evident inthe euro area. The counterpart to that, of course, is that euro area member states do notface individual currency risk. The UK does. And it may well be that markets should regardthis as a downgrade risk for sterling rather than gilts.