DeAnne Julius Says U.S., U.K. at Risk as Investors Seek Out `Weakest Link'
The sovereign-debt crisis engulfing Greece risks spreading to Britain and the U.S. unless decisive steps are taken to rein in their budget deficits, said former Bank of England policy maker DeAnne Julius.
“We’re living in a world economy where there are massive pools of liquidity and the tides shift and they usually shift to target the weakest link,” Julius said in a Bloomberg Television interview in London today. “At the moment that’s been Greece. They’re now looking around to see where else in Europe and the euro area it might be, and indeed I think the risk that this economy and the U.S. faces is that unless we get control of our debt burden we could be in line at some point as well.”
Bill Gross, manager of the world’s biggest bond fund, has grouped the U.S. and the U.K. with Greece, Spain, Ireland and Italy in a “ring of fire,” comprised of countries with the potential for public debt to exceed 90 percent of their gross domestic product within a few years.
Fitch Ratings said last week Britain’s new coalition government needs to accelerate budget-deficit cuts to protect the nation’s top credit rating. In his emergency budget on June 22, Chancellor of the Exchequer George Osborne will outline the scale of the cuts required to eliminate a deficit of 11.1 percent of GDP, the highest since World War II.
“We’ve still got a lot of debt in the economy,” Julius said. “It’s not so much on households, and it’s not so much on banks anymore. It’s been transferred to governments. That debt has to be assumed by someone and if it is the case that the markets think that they need to be paid more to take on that debt, then we will indeed see longer-term interest rates start to rise.”
‘Wait and See’
The Bank of England kept its bond-stimulus program in place and left its benchmark interest rate at a record low last week to aid the economy as Prime Minister David Cameron’s government prepares the biggest budget cuts since at least the 1970s. The risk that Europe’s debt crisis may hurt Britain’s economy means monetary policy makers should “wait and see” even as inflation exceeds the upper limit of the inflation target, Julius said.
“In a way, today’s decision is easier, because almost no one expects a significant tightening of monetary policy in the current circumstances,” she said. “The fact that it is now on hold is the right situation, and if it can be worked off gradually that’s probably the best solution for the economy.”