2010: Easy A – Will Gluck
There’s the good news and the bad news… which would you like first? let’s start with the Eurozone bailout fund, which had its Standard and Poor’s credit rating downgraded last night from AAA. This makes the bail out fund less attractive (solid) and therefore more money is needed to put things right. The IMF might not have enough money either… so could they have some more? Mr Osbourne is being asked to contribute another wad of cash to prop up the financial house of cards. He is keen to ensure that other nations (in particular China) also put more into the tin.
The Italian PM Mario Monti is sounding more than a little anxious as he is suggesting that Germany needs to still do rather more to support the system, which in translation means provide more cash so that new borrowing arrangements are not so punitive as to make them unworkable for Italy. This is not looking much good is it? Add this to the fact that on Friday night France had its AAA status downgraded and we now have the scenario of politicians bleating that the credit rating agencies are wrong and making the situation worse, a situation that they themselves had effectively allowed to occur. The bleating is getting louder and it is my opinion that the blaming will begin rather shortly.
The financial crisis is now akin to the each credit card being maxed out and no one is left able to pay the monthly payments. That is of course unless new money is “created” which is the preferred choice of most Governments except Germany, who are all too aware of the calamity that inflation can bring. Perhaps news of China’s rate of inflation decreasing together with Britain’s rate reducing considerably to 4.2% and set to fall to around 3% by March if Bank of England Monetary Policy Committee Member, Spencer Dale is right, will provide some comfort that inflation is not out of control. That said the Bank of England has a target rate of 2% which it still fails to achieve. Perhaps the signs of falling inflation may move the Germans to relax their views about printing money, though as one of the only growing economies in the world, why they should change policy would surely be questionable. That is until you consider that in this global economy Germany needs to sell manufactured goods to make their own numbers work. Angela Merkel will no doubt be reflecting on how she can pull off helping Eurozone neighbours without ruining her own reputation.
So what does this mean for investors? well frankly more caution. It is important that clients keep in mind when cash (capital) is required from a portfolio – planning withdrawals and ensuring that there is enough in reserve. I also advise checking that you remain “comfortable” with the level of risk within your portfolio and that you discuss with me any changes in your capacity for loss.
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