The Greatest, and Most Frightening, Debt in British History

By William Rees-Mogg

Britain is in a crisis of debt and borrowing. We shall have to worry about the national capacity for borrowing in the gilt-edged market for years to come.

The alarm bell rang last Wednesday, when it became apparent that the gilt-edged market had not liked the Chancellor of the Exchequer's pre-Budget report, not one little bit.

One broker described the mood in the market as 'absolutely furious'. That is bad news for Britain. The gilt-edged market is the heart of British finance.

I fear that the very phrase 'gilt-edged market' is mere financial jargon for most of the people who may be hardest hit by the recession. I always try to look up words in the Oxford English Dictionary when they move on to centre stage in public debate.

I thought I would find a learned reference to a period, probably near the end of the 18th Century, when the Bank of England issued British Government bonds on paper that was literally gilt-edged, like the edges of some leather-bound books.

Instead of that, I found that ' gilt-edged', which is now a phrase confined to British Government bonds, used to refer to any securities of high value. One gets references to colonial or Indian stocks, so described; one even finds 'gilt-edged butter' in the commodity markets. But now the description is indeed confined to those bonds that are issued by the British Government as a way of borrowing money.

Last Wednesday, dealers in these bonds were listening with some anxiety to Alistair Darling's pre-Budget report. They knew he would have to borrow a hideously large sum of money - the deficit has risen to £175 billion.

They know that a large part of the money will have to be borrowed from foreign banks or sovereign funds. They hoped Darling would be able to convince foreign lenders that he was bringing this huge borrowing requirement under control.

Up until the very last moment, Darling must have shared their hopes. He knew better than anyone that the core of the financial problem would be to convince foreign lenders that Britain would tackle the debt problem promptly and firmly.

Foreign lenders do not want to buy a cartload of British gilt-edged stock on a long-term falling market. They want to put their money in a safe place, not bet on a loser.

Read the full article here.