Debts & Loans

The plunge into the red confirmed by Alistair Darling leaves the Treasury borrowing on a scale not seen since at least 1970.

The extent of these huge borrowing plans raises questions about whether the markets will be willing and able to hand over the funding.

The sheer extent of the borrowing totals emphasises the massive challenge for the Treasury’s Debt Management Office in raising the cash the Chancellor intends to spend.

Normally, governments of the rich, developed economies take it for granted that they will be able to borrow on a virtually unlimited basis from the markets, and at a rate that is markedly less than for companies and individuals.

This confidence is based on the readiness of markets to regard government bonds – in Britain, so-called gilts – as ultra-safe investments. In general, they are willing, therefore, to lend in this form for a relatively small return, cutting the cost of government borrowing.

So far, the Treasury has continued to have little difficulty raising the funding needed to fulfil its borrowing needs. In troubled economic times, with the prices of shares and corporate bonds plummeting, domestic and international investors have continued to snap up gilts, as well as bonds issued by other governments.



Prices for gilts, especially those that back short-term lending to the Treasury over only two years, have soared as a result. In turn, this drove the “yield”, or interest rate, on two-year gilts, which moves in the opposite direction to their price, to record lows last week.

But the anxiety now exercising some City economists is that with governments across the West now planning to pump up their borrowing, things might not remain so easy.

The fear is that some investors may start to question the solvency of the Government, leaving them reluctant to lend. In one sign of that, the cost of insuring British government debt against the risk that the Treasury defaults, using “credit default swaps”, has hit a record high.

Britain has also become increasingly reliant on overseas investors in recent years to fund its government borrowing needs.

Michael Saunders, chief UK economist at Citigroup, says that the concern is that with other big economies also borrowing heavily and trying to tap the same sources of foreign finance, Britain could face a bigger challenge to fulfil its borrowing needs. In turn, this could drive up the cost of that borrowing sharply.

A further worry comes from the steep fall in the pound. This could make British government debt still less appealing to foreign investors.