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Alarm as UK Treasury bond auction fails

Section: Daily Dispatches

By Robert Winnett
The Telegraph, London
Wednesday, March 25, 2009

Fears are growing on the financial markets that Britain may not be able to repay the billions of pounds in debt it is amassing to rescue banks and revive the economy.

The Government admitted yesterday that, for the first time since 1995, investors had been unwilling to buy the full complement of its so-called gilt-edged bonds at one of its official auctions.

Gilts are the financial instrument it sells to investors to fund public spending. If future gilt sales are unsuccessful, it could be devastating for Gordon Brown because he might have to scale back his spending plans.

The failure of yesterday's auction followed a warning from the Governor of the Bank of England on Tuesday that the country could not afford to introduce another fiscal stimulus package of spending rises and tax cuts.

Although some experts attributed the failure to confusion in the market, rather than concern over Britain's solvency, it was highly embarrassing for Mr Brown coming just days before world leaders are due to meet in London for the G20 summit to discuss the economic crisis.

George Osborne, the shadow Chancellor, said: "The failed gilt auction, the first for many years, should be of real concern to everyone. It is too early to say, but the risk is that at some point the Government will not be able to fund its huge debts."

Gilts are issued by the Treasury to fund Government borrowing. Investors receive an annual rate of interest from the Government after buying gilts from the Treasury.

They are traditionally regarded as one of the safest forms of investment.

The Treasury holds regular auctions of gilts and they are usually oversubscribed, with investors wishing to buy more than twice as many gilts as those being sold.

However, yesterday investor interest in the gilts was understood to have been the lowest in history. The lack of interest is likely to concern Mr Brown and Alistair Darling, the Chancellor, as their plans for Britain's economic recovery are based on dramatically increasing public borrowing by issuing more gilts.

A lack of investor interest in gilts could also lead to Britain's credit rating being cut, which means the Government would have to pay more to borrow in future. Interest rates on the Government’s debts rise when gilt prices fall.

Writing for the Telegraph, David Cameron, the Tory leader, said yesterday's failed gilt auction was a "worrying sign, because higher interest rates will increase the cost of paying for the national debt and could deter the investment we need to get us out of this recession. That would make the recession longer."

The Conservatives have already said Britain is facing bankruptcy as public spending and therefore borrowing increases rapidly.

The national debt is forecast to rise to more than £1 trillion by 2013. Mr Brown recently abandoned the so-called "golden rules" that limit public borrowing.

He was understood to have been considering announcing a new fiscal stimulus package in next month's Budget and encouraging other countries to do the same in an attempt to tackle the global recession.

However, many European leaders are growing increasingly concerned over the scale of public borrowing. Mirek Topolanek, the Czech prime minister, who holds the presidency of the European Union, said plans by Britain and America to borrow money to fund an economic recovery plan were a "way to hell."

In the face of such criticism, Mr Brown, speaking in New York yesterday, appeared to indicate that the Government was backing away from further tax cuts or public spending increases. He highlighted other measures the Government was taking, and suggested that quantitative easing -- effectively printing money to buy assets -- was now the preferred method for tacking the economic crisis.

Despite the gloom one of the City's most respected economists claimed yesterday that the global economy was turning the corner. Larry Kantor, the chief economist at investment bank Barclays Capital, advised clients to "become more aggressive" and start buying shares again.

He said factories that stopped or slowed their production lines have run down their stockpiles of goods to such an extent that they will have to start gearing up again to meet demand -- triggering a dramatic jump in the world's economy.

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