UK fails in bid to borrow £1.75bn
Mervyn King cautioned British Prime Minister Gordon Brown against more borrowing for a second stimulus package in next month's budget (Photo by Oli Scarff/Getty Images)
Thursday March 26 2009
THE British government failed in an attempt to borrow £1.75bn from the financial markets yesterday -- the first such reverse in seven years.
Although it was not a typical borrowing exercise, analysts said the failure indicated concerns about both rising UK inflation and the government's huge borrowing spree.
They said a warning by the Bank of England Governor Mervyn King earlier in the week, cautioning UK prime minister Gordon Brown against more borrowing for a second stimulus package in next month's budget, sent shivers through the market in government bonds (debt).
Figures on Tuesday showed a shock rise in inflation to 3.1pc in February, which compared with an estimated 2pc in the euro area, and 0.1pc in Ireland.
Mr Brown's government faces a deficit of about 11pc of GDP this year -- a similar deficit to this country's, which has drawn fierce criticism from many UK analysts and sent interest rates on bonds here rocketing to 5.8pc.
"This is a warning signal investors are sending to the British government," said Neil Mackinnon, chief economist at hedge fund ECU Group Plc in London and a former Treasury official. "Investors are giving the thumbs down to the gilt market."
A stronger reaction came from Bill Jones, professor of politics at Liverpool Hope University. "This sinks Brown below the waterline," he said. "His whole strategy is based on borrowing and now he can't get anyone to buy his gilts. This means the prospect of going cap in hand to the IMF hovers increasingly into view."
Strategy
Padhraic Garvey, head of investment-grade bond strategy at ING in Amsterdam, said that, while technically this was a failed auction, there were other factors at work.
"More important has been the awful performance of long dated bonds so far this year, with a fall of 9pc in the price of UK 30-year bonds, as long-term interest rates rose." The cost of insuring Irish government debt against failure to repay fell this week, when the National Treasury Management Agency succeeded in auctioning €1bn in 10-year bonds. The cost peaked at 4pc last month, but was down to 2.25pc yesterday.
"I don't know the particular circumstances of the UK market and it would be incorrect for me to comment," Michael Somers, chief executive officer of the NTMA told Bloomberg.
"In terms of our own activities, we have always engaged in quite an amount of marketing. We should be doing more and in fact our intention is get out and do a number of roadshows over the coming months."
- Ailish O'Hora Business News Editor
