City alarm as Treasury fails to sell Government gilts
Britain's ability to borrow tens of billions of pounds to fight the
economic crisis has been called into question after the Treasury failed
to sell Government gilts for the first time in more than a decade.
By Robert WInnett, Deputy Political Editor
Last Updated: 11:55PM GMT 25 Mar 2009
Fears are growing on the financial markets that Britain may not be able
to repay the billions of pounds in debt it is amassing to rescue banks
and revive the economy.
investors had been unwilling to buy the full complement of its so-called
gilt-edged bonds at one of its official auctions.
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Gilts are the financial instrument it sells to investors to fund public
spending. If future gilt sales are unsuccessful, it could be devastating
for Gordon Brown because he might have to scale back his spending plans.
The failure of yesterday’s auction followed a warning from the Governor
of the Bank of England on Tuesday that the country could not afford to
introduce another fiscal stimulus package of spending rises and tax
cuts.
Although some experts attributed the failure to confusion in the market,
rather than concern over Britain’s solvency, it was highly embarrassing
for Mr Brown coming just days before world leaders are due to meet in
London for the G20 summit to discuss the economic crisis.
George Osborne, the shadow Chancellor, said: “The failed gilt auction,
the first for many years, should be of real concern to everyone.
‘‘It is too early to say, but the risk is that at some point the Government will not be able to fund its huge debts.”
Gilts are issued by the Treasury to fund Government borrowing. Investors
receive an annual rate of interest from the Government after buying
gilts from the Treasury.
They are traditionally regarded as one of the safest forms of
investment.
The Treasury holds regular auctions of gilts and they are usually
oversubscribed, with investors wishing to buy more than twice as many
gilts as those being sold.
However, yesterday investor interest in the gilts was understood to have
been the lowest in history. The lack of interest is likely to concern Mr
Brown and Alistair Darling, the Chancellor, as their plans for Britain’s
economic recovery are based on dramatically increasing public borrowing
by issuing more gilts.
A lack of investor interest in gilts could also lead to Britain’s credit
rating being cut, which means the Government would have to pay more to
borrow in future. Interest rates on the Government’s debts rise when
gilt prices fall.
Writing for the Telegraph, David Cameron, the Tory leader, said
yesterday’s failed gilt auction was a “worrying sign, because higher
interest rates will increase the cost of paying for the national debt
and could deter the investment we need to get us out of this recession.
That would make the recession longer”.
The Conservatives have already said Britain is facing bankruptcy as
public spending and therefore borrowing increases rapidly.
The national debt is forecast to rise to more than £1 trillion by 2013.
Mr Brown recently abandoned the so-called “golden rules” that limit
public borrowing.
He was understood to have been considering announcing a new fiscal
stimulus package in next month’s Budget and encouraging other countries
to do the same in an attempt to tackle the global recession.
However, many European leaders are growing increasingly concerned over
the scale of public borrowing. Mirek Topolanek, the Czech prime
minister, who holds the presidency of the European Union, said plans by
Britain and America to borrow money to fund an economic recovery plan
were a “way to hell”.
In the face of such criticism, Mr Brown, speaking in New York yesterday,
appeared to indicate that the Government was backing away from further
tax cuts or public spending increases. He highlighted other measures the
Government was taking, and suggested that quantitative easing –
effectively printing money to buy assets – was now the preferred method
for tacking the economic crisis.
Despite the gloom one of the City’s most respected economists claimed
yesterday that the global economy was turning the corner. Larry Kantor,
the chief economist at investment bank Barclays Capital, advised clients
to “become more aggressive” and start buying shares again.
He said factories that stopped or slowed their production lines have run
down their stockpiles of goods to such an extent that they will have to
start gearing up again to meet demand – triggering a dramatic jump in
the world’s economy.
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