U.K.’s public finances start a hectic week

The start of the week was rather mixed with investors confronted with better than expected euro area, while the total opposite from the US. Europe is outperforming after the extensive period of negativity on the back of the debt crisis breakout.

Yesterday we saw Moody’s downgrade Ireland’s credit rating to Aa2 from Aa1 while moved the country’s outlook from “negative” to “stable”. Nonetheless, the market seemed reluctant from focusing on the downbeat data and instead relayed on the good data from Europe along with remaining optimistic ahead of the stress test results to be published later this week.

The debt crisis is the heavy burden on Europe, and the United Kingdom that does not share the euro agony is still suffering the negativity of its inflated deficit.

Today’s deficit expectations signal that analysts expect an extended ballooning deficit and for borrowing to have continued to rise in June. Public Sector Net Borrowing is expected to reach £13.1 billion in June down from May’s £16.0 billion. While in cash requirements it is expected to have risen to 16 billion pounds from the previous £12.0 billion.

Britain’s budget deficit stood around 11% of last year’s GDP, where the longest U.K. recession on record following the worst financial crisis since the Great Depression, deteriorated what was already a ballooning budget shortfall.

In June Cameron’s new government and Chancellor Osborne proposed an emergency budget proposal to eliminate the shortfall which they accused the Labour party to have built over the past 13 years.

Investors are not focused on the budget anymore as much as they fear that Osborne’s additional spending cuts and raise in VAT and levy on banks alongside other measures will hurt the ongoing fragile recovery.

Growth is expected to reach 1.2% in 2010 and 2.3% next year, while it will reach 2.8% in 2012 followed by 2.9% in 2013, according to the British government. 

Still, the new spending cuts have not started to show their way into the economy yet and accordingly the focus will be stolen from the budget figures today as investors await the BoE Minutes and the advanced GDP estimate for the second quarter which will further detail the conditions in the UK economy.