One of the best reasons for having a flick through the Daily Mail on a Saturday is Peter Oborne’s column on Westminster. Oborne, whose brilliant Triumph of the Political Class is a handbook for those disgusted at/despairing of British politics, doesn’t muck about. His column on Saturday revealed that Mervyn King, the Governor of the Bank of England, is none to happy with Gordon Brown’s last big punt on the stalled economy: printing more money, or, as the spin doctors would have it, quantitive easing. These few pars were significant, I thought:
Although the Prime Minister wants details of this plan to be unveiled at the time of next month's Budget, I can reveal that it has met with unexpected and powerful opposition from the Bank of England Governor, Mervyn King. The Governor is very worried about the Labour Government borrowing yet more money and launching a mammoth public spending splurge.
The Governor's reservations have been passed to Treasury officials via unofficial channels. One of the main reasons for Mervyn King's deep concerns is that he is determined not to go down in history as the Bank of England governor who presided over the collapse of the creditworthiness of the British state.
He is increasingly worried that extra government spending will damage the official credit ratings that are awarded to the Government as an independent yardstick of the health of the nation's finances. If our rating were downgraded, it would have a severe effect on the ability of the Treasury to raise more money on the international currency markets because it would be forced into paying a much higher rate of interest.
Earlier this year, there was speculation that the world's premier rating agency, Standard and Poor's, was ready to take the unprecedented step of lowering its rating for British government creditworthiness from its gold-plated triple 'A' classification to a lesser grading. It eventually held back from making such a damaging move. Since then, however, the outlook for the British economy has darkened.
Crucially, the decision to print extra money has very badly compromised the integrity of the Government's debt financing and it also now looks certain that Chancellor Alistair Darling will be forced to revise sharply upwards his forecasts for borrowing in his Budget. Mervyn King is therefore afraid that Gordon Brown's 'fiscal stimulus' will result in the downgrading of Britain's credit rating on the basis of pessimistic predictions about the Government's ability to repay its debts.
The Bank of England is under no illusions of the dire consequences that could follow. Above all, there would be flight of foreign capital from Britain, leading to the collapse of sterling in the international currency markets. More worrying would be the consequence for interest rates.
At present, the Government's gold-plated 'AAA' rating means that it can repay loans at a beneficially low interest rate. But if Britain's credit rating were lowered, the Treasury would be hit by having to pay much higher interests rates for loans. This, in turn, would lead to the Bank of England's Monetary Policy Committee being forced to sharply raise base rates for everyone - thus driving the country even deeper into recession. Such a crisis of confidence is exactly what happened in the Seventies when interest rates soared into double figures and when Labour Chancellor Denis Healey was forced to go cap in hand to the International Monetary Fund (IMF) to save the country from bankruptcy.
The rest is here. Let's see what happens. Reading this story reminded me of a news story a week or more back, when Brown was calling for countries to give more money to the IMF. Perhaps he knows a country that's going to need it . . .
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