Will the sovereign debt crisis hit the UK 2012

Will the sovereign debt crisis hit the UK 2012 : David Schwartz, considered amongst the most eminent of financial historians, has told Sky News that for the first time in 20 years he's unable to make a prediction for the economy in the year ahead.

"This is the first time in almost two decades where I've found it very difficult to make a call as to where I thought the stock market would finish up towards the end of 2012," he said.

Mr Schwartz suggests that the UK finds itself caught in the middle, between an improving US market across the pond and ongoing uncertainty across the Channel. read news.sky.com

But that does not mean Britain will default. Instead of the expected recovery, growth has flatlined. That has forced the government to postpone meeting its public debt and deficit targets.

Continued stagnation or a second recession could quickly worsen the debt dynamics further and trigger self-fulfilling fears among bond investors. If this happens, the government will be in a bind. It has tied itself so tightly to the mast of austerity that it cannot loosen its policies without scaring the markets.

The Bank of England may expand its quantitative easing programme enough to keep gilt yields from soaring. But its help will not look pretty: sterling will fall and inflation will increase. While this will not upend UK public finances, it could sink the government’s re-election prospects.
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