After Spain gets threatened with downgrade

http://www.telegraph.co.uk/finance/4224453/SandP-threatens-to-strip-Spain-of-top-AAA-rating.html

and then downgraded just over a week later

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4292055/SandP-strips-Spain-of-its-AAA-credit-rating.html

I was wondering why the UK hadn't also been downgraded. The gradual nationalising of the banks is going to potentially give us large problems in years to come

"Assume the state takes ultimate responsibility for all of Britain’s banks. Further, assume that 15 per cent of those banks’ assets are worth nothing. The write-off would be equivalent to about £600bn or a third of GDP. Britain’s debt to GDP ratio is about 54 per cent; add in these and other bail-out costs and the ratio could easily double. That would make the UK comparable to Belgium, Greece and Italy – none of which, as Merrill Lynch notes, has a triple A credit rating"

especially when I read this

http://www.ft.com/cms/s/0/a5c6bfe2-e67b-11dd-8e4f-0000779fd2ac.html

For taxpayers, the prospect of taking on this risk may seem alarming. However, officials stress that the government is planning to insure only against extreme scenarios in which the bulk of a large pool of loans goes bad. That is similar to insurance bought by companies seeking to protect themselves against the remote possibility of being hit by a hurricane or an earthquake.

BLACK SWAN ALERT!

Looking at the CDS market (10Y, Spain and UK have been trading pretty much in line over the last few months, only over the last few days has Spain moved wider after the downgrade

My fantasy portfolio  buy of UK 5Y @67 is looking good

http://www.noelwatson.com/blog/PermaLink,guid,0c5c8ee2-cafe-4a5f-9f55-e0a0af90dc9e.aspx

I think it is only a matter of time before S&P put the UK on rating watch

EDIT: Forget to include the FT weather map

http://www.ft.com/cms/s/0/d99064aa-e65c-11dd-8e4f-0000779fd2ac.html

UPDATE:

Talking of tail risk, I wonder if the Government have taken this into account

http://online.wsj.com/article/SB123241510486096355.html

Analyst reports issued by Morgan Stanley and Royal Bank of Scotland Group PLC last week each said derivatives were pricing a peak-to-trough fall of 45% in U.K. house prices from August 2007 to the end of 2010. RBS's estimated that such a substantial fall would put 60% of HBOS's mortgage book into negative equity, more than half on Lloyds TSB's books and more than a third at Barclays PLC and RBS. HBOS and Lloyds this week merged into Lloyds Banking Group PLC.

UPDATE 2:

Couple of articles in weekend FT

#1

http://www.ft.com/cms/s/0/41827e52-e9bb-11dd-9535-0000779fd2ac.html

"He also points out that in previous emerging market currency crises - Argentina in 2002, Russia in 1998 and Indonesia in 1997/8 - wholesale selling of bank shares quickly translated into wholesale selling of the country itself. Unlike those countries, of course, the vast majority of UK debt is sterling denominated.

However, that could quickly change if RBS were nationalised. Morgan Stanley thinks half or more of RBS's £1,700bn of liabilities could be denominated in currencies other than sterling."

#2

http://www.ft.com/cms/s/0/92011204-e988-11dd-9535-0000779fd2ac.html

But the prime minister cannot be so definitive on Britain having no possibility of defaulting. After all, the country has form.

As Kenneth Rogoff and Carmen Reinhart have documented in their history of sovereign defaults, England’s monarchs regularly refused to pay their debts. Edward III defaulted on debt to Italian lenders in 1340 after a failed invasion of France that set off the 100 years war. Henry VIII seized the Roman Catholic Church’s lands. “While not strictly a bond default, such seizures, often accompanied by executions, qualify as reneging on financial obligations,” professors Rogoff and Reinhart observe drily.

England defaulted in 1672 in the “Stop of the Exchequer” and, in the last century, Britain in effect defaulted in 1932 in a “voluntary” reduction on the interest it paid on war loans.

http://www.publicpolicy.umd.edu/news/This_Time_Is_Different_04_16_2008%20REISSUE.pdf