48 years ago, painful memories were awakened! The UK performed a "double debt strike", is a debt crisis about to come back?

The recent turbulence in the UK bond market has been compared to the chaos of Prime Minister Tress' mini-budget in 2022, but some analysts believe that it may be more appropriate to compare it to the debt crisis of the 1970s. This analysis comes from former Bank of England interest rate setter Martin Weale, who suggests that the Labour government may have to cut spending to reassure the markets that it will address the escalating debt burden in the UK if sentiment does not change. In the past few days, the cost of long-term borrowing in the UK has soared, and the pound has plummeted - this rare combination may indicate that investors have lost confidence in the government's ability to control government bonds and inflation. Normally, rising yields would support currency performance. Weale suggests that these events are reminiscent of the "nightmare" of the debt crisis in 1976, which forced the government to seek assistance from the International Monetary Fund (IMF). The soaring cost of debt could also potentially wipe out the meager buffer of 9.9 billion (12.2 billion) that Chancellor Rachel Reeves had obtained according to budget rules, leading to chaos before the official fiscal update on March 26. Other economists and investors attribute the market trends to skepticism about Labour's pledge to fund significant spending increases with the fastest growth. "We haven't really seen a significant drop in the pound and a rise in long-term interest rates since 1976. This situation pushed for IMF assistance back then," said Martin Weale, current Economics Professor at King's College London, in an interview. "We're not in that situation yet, but it may be one of the Chancellor's nightmares." Nearly half a century ago, the UK faced a crisis due to massive budget and trade deficits, prompting the UK to seek a $3.9 billion loan from the IMF. In return, the government agreed to accept the IMF's proposed austerity measures. Today, the UK is facing twin deficits again, which have been ongoing for years. Cost of borrowing On Wednesday, the UK's 10-year government bond yield surged 14 basis points to 4.82%, reaching its highest level since August 2008. The pound fell against all major currencies, dropping over 1% against the dollar, while the UK stock market declined. Since the beginning of the year, the UK government's borrowing costs have risen at a faster pace than France's. France is currently in political turmoil, borrowing more, and has higher public debt. Financial market investors say that the attention on the UK reflects concerns about how Labour will effectively implement its budget plans and potential inflation concerns. Labour's budget plans are supported by optimistic growth forecasts. Weale suggests that if the current market conditions deteriorate, Labour will have no choice but to cut spending and raise taxes to assure the market that "debt is being properly managed." Some market participants also compare it to the UK's 2022 gilts crash, when Chancellor Kwasi Kwarteng announced a series of sweeping tax cuts and spending commitments. Neil Birrell, Chief Investment Officer at Premier Miton Investors, describes the recent market events as "the buildup before an eruption, similar to what happened before and after the Tress budget." "Out of control" Referring to the UK's second-largest tax increase budget announced by Reeves on October 30, Birrell said, "We have reached a point of market out of control." Mike Riddell, portfolio manager at Fidelity International, also noted the combination of a weaker pound and higher UK government bond yields, "eerily reminiscent of August and September 2022, and if the situation continues, it could be evidence of a buyer strike or capital flight." However, Michiel Tukker, Senior European Interest Rate Strategist at ING Group, is not as pessimistic. He says the potential for further declines in the pound is "likely limited, as it is not a sovereign crisis." A spokesperson for the UK Treasury said that its fiscal rules are "non-negotiable, and the government will maintain strict control over public finances." They added that the UK's debt level is the second lowest in the G7, with only the independent fiscal watchdog, the Office for Budget Responsibility, able to accurately forecast the remaining debt level. "Anything else is pure speculation." The Bank of England said it is watching the markets as usual. In recent weeks, there has been a steady stream of negative economic news. Economic growth has stagnated since Labour's overwhelming victory in the July election, and business sentiment has deteriorated since Reeves proposed a plan to raise taxes by over 40 billion. GDP remained stagnant in the three months ending in September and is expected to continue to stagnate until the end of 2024. The budget plan includes an additional borrowing of 140 billion for climate change and rebuilding public infrastructure, which has alarmed investors as it is roughly twice the market's expectations. Before the budget announcement, the IMF stated that the UK's debt risks were "rising," and "a lack of reliable contingency plans could trigger adverse market reactions." "The painful sequel" Given Reeves' promise to only hold one policy event per year, she has left herself the weakest cushion in her self-set fiscal rules, paying for daily expenses from taxes, which has increased market uncertainty and jeopardized her reputation. Now, the Chancellor has no room for manoeuvre, and if there are no changes, she will be forced to either cut spending or raise taxes in March. Some officials say she would prefer to cut spending. Sanjay Raja, Chief UK Economist at Deutsche Bank, said, "The upcoming Spring Statement, Spending Review, and Autumn Budget are likely to be a painful sequel to this Chancellor's historic first budget." Weale suggests that the budget issue has been brewing for a long time, as successive Conservative Chancellors have failed to address the UK's escalating debt burden, with the UK's debt burden currently at its highest level since the early 1960s. Weale said: "The policy over the last 20 years has been to let it (debt) rise when there's a problem, rather than cut it when the situation is clear."Perhaps surprisingly, the market is just now beginning to pay attention to this.s'il vous plat aidez-moi