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Former Thatcher advisor says Government may be heading towards IMF bail-out

By Amy Willis

Indicators are emerging showing the UK government may be heading towards a bail-out from the International Monetary Fund, Lord Christopher Monckton, policy advisor to Margaret Thatcher for four years, has warned.

The sudden increased value of UK credit default swaps could indicate the government is taking a turn for the worst, he explains.

Credit default swaps (CDS) offer credit protection for bondholders to cover losses if loan repayments default – similar to an insurance policy. Before the global financial crisis UK bonds were seen as relatively risk free and CDS spreads were generally stable at a rate of about 2bp. In the last few months this price has risen sharply to 120bp, almost double that of French, German, US and Japanese spreads but better than Italian spreads which are 166bp. Lord Monckton says this indicates investors may be wondering if the government is able to keep up with its debt repayments.

Lord Christopher Monckton

Lord Christopher Monckton

He says, if the UK is to avoid going to the IMF, enhancing investor confidence in the security of sovereign bonds is essential. The government needs to cut public expenditure and avoid the public sector ‘crowding out’ the private sector. This would mean introducing a range of unpopular policies which may include freezing civil service recruitment and addressing the index-linked pension time bomb.

Lord Monckton said: “However unpopular it is, we have to cut public expenditure down to size and live within our means. The private sector is collapsing under the weight of overtaxation and overregulation.

“As unemployment begins to rise there will be additional social security costs. Taxation revenues will plummet, which means less money coming in and more money going out. On top of that you have pre-existing debt on an unimaginable scale. When the government can no longer borrow money and is not making enough on its current account, they will go under. At that point they have to go and queue up at the IMF and request assistance.”
David Cameron, the Conservative party leader, who has been criticised in recent weeks for failing to say how he would help investor confidence, agrees the UK government could be heading in this direction. When asked if the UK was heading towards bankruptcy he said: “The simple answer is yes.”

cdsA Treasury spokesman released this statement: “The government is committed to taking real action now and in the months ahead to lead the UK economy to recovery as we confront the global downturn. The actions we have taken to improve stability in the financial sector and our work to stimulate the economy through the cut to VAT, support for business, and major investments in infrastructure will make a significant difference.

“In the Pre Budget Report the Chancellor clearly outlined how public finances will be managed through the downturn and made it clear that the government will pursue a policy of reducing debt as a proportion of GDP every year once economic growth returns. The Treasury is confident that the UK is not headed to bankruptcy or a bail-out.”

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