The Corner

The Limits of Debt

The U.K. is not the U.S., but as Congress considers Obama’s budget, this story from the Daily Telegraph is well worth noting:

The Government has suffered a major blow to its economic stimulus ambitions after an auction of Treasury gilts failed for the first time in more than a decade, underlining the market’s fears about the state of the nation’s finances. The UK Debt Management Office (DMO) attracted just £1.67bn in bids for its sale of £1.75bn of 2049 gilts this morning, its first uncovered auction of conventional gilts since 1995. The cover of just 0.93 times is believed to be the lowest in history and far worse than the 0.99 times in 1995. The average cover of the last three auctions was 2.1 times.

And for those worrying specifically about the U.K.’s prospects, this passage is not reassuring:

Failure raises fears that the Government may not be able to secure the billions of pounds its needs from the markets to fund its record fiscal deficit without paying far more for the money, and reflects concerns about UK economic stability. It comes at a highly embarrassing time for Gordon Brown, who is hosting a summit of G20 leaders next week to spearhead recovery plans for the global economy. His call for further economic stimulus packages was also called into question yesterday by Mervyn King, Governor of the Bank of England, who warned that the UK finances were so stretched the Government would be unable to launch new spending plans. Moreover, politicians have raised concerns that an uncovered gilt auction could lead to a cut in the sovereign credit rating, which could have devastating consequences for the national debt – due to hit a record £1 trillion – as the interest bill would soar.

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