Cut Now - or We'll Be the New Greece; Economic Analysis

Article excerpt

Byline: by Alex Brummer CITY EDITOR

BRITAIN is in grave danger of sleepwalking into disaster.

Even before the election stalemate, there had been an extraordinary deterioration in the global economy with the crisis in Greece starting to contaminate the banking system - much as America's sub-prime mortgage debt did in 2007-08.

The dramatic fall of prices on Wall Street on Thursday night was not an isolated incident. It was part of a disturbing trend in which the FTSE 100 fell more than 10 per cent since the start of the election campaign.

These falls and the rising cost of Britain's borrowing on global markets reflect a broad loss of confidence in the stability of the banking system. This has been worsened by the failure of the EU and the IMF to staunch the euroland crisis.

If there was any lingering doubt that Britain must urgently address the black hole in its public finances, it has now been extinguished.

Greece, Portugal and Spain have seen the consequences of failing to grapple with bloated state spending, ballooning deficits and rapidly accumulating debts.

The markets have no appetite for protracted political horse-trading.

Instead, they are demanding decisive action.

For the next couple of days at least, the main credit rating agencies Moody's and Standard & Poor's (whose judgments determine how much the Government must pay for its borrowing) have promised to give Britain some breathing space while the next government is stitched together. But if whoever takes charge does not quickly implement plans to deal with the budget cataclysm then Britain's much coveted triple 'A' credit rating will be in serious danger.

In any case, borrowing has already become much more expensive, with British debts costing more to repay than German equivalents.

Because the UK is outside the straitjacket of the euro, a falling pound can aid recovery by helping exporters.

The problem is that a dramatic a slide in the pound - it has already fallen 25 per cent against a basket of the currencies of our trading partners in the past 18 months - could become a full-scale sterling crisis, which would result in soaring interest rates imposed by the foreign markets. …