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By David Thomas

LONDON (MNI) – Official UK fiscal targets look set to get ditched
when Chancellor of the Exchequer George Osborne delivers his Autumn
Statement on Dec 5; and dismal UK fiscal fundamentals mean a
reassessment of the UK public finances at some point can’t be ruled out,
whatever the present safe haven allure of gilts.

Sterling asset managers and UK fiscal analysts warn the chancellor
will need to thread his way carefully through several potential
minefields in the months ahead.

Above all, Osborne will need to handle the communication of any
target/rule change much more deftly than he has in the past. His poor
record to date for public relations suggests that there could be
trouble ahead.

However, Osborne may be able to hide any fiscal slippage behind
covering fire recently provided by the Bank of England Governor Mervyn
King.

In an interview with Channel 4 recently, King said it would be
alright to allow the debt burden to rise after 2014: “If it is because
the world economy is growing more slowly, then it would be acceptable.
It would not bit be acceptable to miss the debt target if there were no
excuse for it,’ he said.

PIMCO boss Bill Gross warned this week that the UK is part of a
“ring of fire” of indebted nations and that around stg990bn of
savings need to be found in the next 5/10 years.

Greece, Spain, Japan and the U.S. form the other links on Gross’s
ring.

So far the UK has maintained its safe haven allure as the euro zone
crisis continues to frighten away international investors from the
troubled fringe of the single currency bloc.

PIMCO’s Managing Director of Sterling Portfolios Mike Amey sees a
“variety of risks out there – some could have a material effect, some
not”.

He is sanguine about what tack Osborne will take in his statement
and its market impact, suggesting the chancellor will blame fiscal
shortcomings on weaker-than-expected growth and lay the blame for that
firmly at the euro’s door.

Osborne should say he is sticking with his departmental spending
plans but allow the cyclically sensitive part of the budget to climb.

“His planned ‘resizing’ of government will remain intact, but the
speed of the resizing will be slower,” Amey said.

Amey dismisses ideas of brand new fiscal rules or targets winning
cross-party support as politically unreal.

Global Head of Fixed Income at Aberdeen Asset Management Paul
Griffiths says markets have every right to be concerned about gilts. But
the timing of any ‘snap’ impossible to forecast.

Amey and Griffiths both agree that a UK ratings downgrade is
unlikely to prove a catalyst even if one materialises.

Both note the recent S&P downgrade of the U.S. failed to prevent a
rally in U.S. Treasuries.

For Griffith too, key to Osborne’s spin control will be explaining
“why the slippage”.

The chancellor will need to “demonstrate a clear narrative that he
is sticking to the path of fiscal rectitude”.

“Certainly, better delivery and clarity of message than he
demonstrated at the time of the 2012-13 Budget will be the key,”
Griffiths said.

Some European voices look at the UK with a mixture of consternation
and envy – an AAA rating and 10-year gilt yields close to those of bunds
juxtaposed with a deficit and debt worthy of a Hellenic horror story.

As Griffiths points out, if the UK had joined the euro in 1999,
markets would not have had time to worry about a sprat like Greece. They
would have had a much bigger fish to fry.

Staying out means the Bank of England has been able to implement QE
without the need for sterling’s real exchange rate to massively
depreciate.

ECB bond buying in the periphery – if and when that actually
happens – might conceivably help some risk-on scenarios blossom in which
gilts could lose some of their safe haven lustre, he surmises.

“But let’s face it, the euro zone crisis is not going away anytime
soon,” he quickly adds.

–London Bureau; tel: +442078627492; email: dthomas@mni-news.com

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