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Moody's downgrade

Moody's has downgraded the senior debt and deposit ratings of 12 UK financial institutions, including Nationwide, RBS and Lloyds-TSB.  See their reasoning here.

Moody's seems to believe that the UK government's commitment to have no further bank bailouts is credible.  However, there is what economists call a time-inconsistency problem with this type of commitment.  In other words, when it comes to the crunch, politicians will expediently go back on their verbal commitment. 

The big mistake made by governments around the world during the 2008 crisis was to bail out the creditors of large financial institutions.  It is okay reimbursing small retail depositors out of taxpayer funds, but it is something entirely different to bail out large creditors.  In the parlance of the market, these creditors should have been forced to take a haircut - short back and sides all round!  Unfortunately, that didn't happen, and as consequence, taxpayers in Western democracies will possibly face years of economic hardship.  Social strife and political upheaval may even follow.  

Apologies for all this doom and gloom on a Friday afternoon!

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