UK Sovereign Debt & Bonds Auctions

The massive UK Government debt forecast by Brown and Darling in their recent budget and pre-budget reports is to be largely funded by the sale of UK bonds.

Essentially these are promises that the UK will pay back the money spent on buying the bonds, with an additional yield paid when the bond matures after a period of time, usually between 10 and 30 years.

Traditionally, sovereign debt, especially amongst mature economy developed world countries, has been considered some of the safest debt to own as it is very unlikely that a politically and economically stable country is going to default.

However, with so many countries now looking to fund their debt in this way, there is a possibility that not everyone will be able to sell their bonds at the price they wish.

The UK has already increased their yields in order to sell £2bn of bonds last week.

Worse still, an auction of German bonds, typically considered the most liquidable assets, on Wednesday saw the Germans sell only 87% of the bonds that were released, earning 5.2bn Euro instead of the 6bn they had been predicting.

With the UK looking to raise £146bn in this way this year alone, we must be prepared for the moment when the market decides that it doesn’t want ‘our’ debt, and government must ensure that the cash flow is in place so that we don’t have to cut 13% or more from budgets in a nightmare scenario.

The Cost of Irresponsibility?

I wrote a short piece on Monday about the announcement of the UK's national debt figures for September 2008.

Since then, the Centre for Policy Studies have published a brief report by Conservative MP Brooks Newmark estimating that the cost of what's 'hidden' from the national debt figures - relating to unfunded public pensions liabilities, the full cost of PFI projects, Network Rail's debt and Bradford & Bingley's nationalisation - is much higher than the official figures.

They estimate that this figure is as high as £1,854bn, three times the official figures announced on Monday, or, including the further £500bn that's been promised for bank bailouts, £2,354bn.

In addition to Monday's figures, this has been broken down as being:

* £1,071bn on public pensions using the discount rate from the risk-free yield on index-linked government debt (as the government is not at risk of default),
* £30bn for Bradford & Bingley (using the justification that by being the second nationalisation in a year it is, by definition, not a 'one-off'),
* £20bn for Network Rail which the government would have to pay if the company failed; and
* £100bn for PFI projects - not including the ever-present risk of failure of PFI (this is a Tory pamphlet, so they don't want to suggest that private finance might be a bad thing!)

Including the banking bailout, this amounts to 161% of the UK GDP or £96,475 per household.

Perhaps Gordon shouldn't have been quite so quick to start pulling up figures about our GDP debt compared to other countries