A new government is formed in Europe and problems ensue.
They check the books from the outgoing administration and discover things are worse than they knew. If this sounds familiar, it should as this is what happened in Greece. It is now occurring in the United Kingdom.
The new coalition government in the UK has called for independent auditors to review the UK’s finances to establish the true scale of the official deficit and debts. The Office for Budget Responsibility will start tomorrow on the project. Keep a keen eye out for when they will deliver their report as it could be a disaster for the currency if it comes in significantly higher than what is already expected. Currently, the UK government has an annual deficit of Gbp167 billion or about 11% of GDP.
The markets will anticipate this scenario and sell pounds now.
The currency dropped 300 points today before recovering 2/3rds of the drop. It doesn’t help when the new UK finance minister George Osbourne fans the flames by saying the British economy is in a dire state and difficult times lie ahead. (Track Currencies Here.)
As far as Greece goes, they just received there initial loan/bailout funding from the IMF and Europe.
This allows them to skip a refunding for May 19th and likely to skip refunding themselves for the entire year. The interesting aspect is that they have to meet quarterly targets to keep getting the funding. Therefore, like the UK above, there will be a time after each quarter that a report will need to be issued and information disseminated over whether Greece is following the rules to get the money.
The patterns will now be similar and the market reactions should be fun to watch.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.