UK second most at risk from debt crisis of all major economies
The UK is the second most likely major economy to face a debt crisis in the next two years, a fresh survey of financial professionals has found, as investors remain unconvinced by the country’s growth prospects and efforts to keep a lid on spending.
According to a Deutsche Bank poll released on Monday, France is the only major economy more likely to face a bond crisis before 2028, with the UK coming ahead of debt-riddled Japan and a United States currently running a $1.8 trillion deficit.
Over half of the study’s institutional investor respondents identified France as the most likely country to face a crisis-level bond sell-off. The country remains in the throes of a political impasse over its fiscal direction, which has seen three prime ministers resign after failing to push through a budget policymakers could agree on.
Its deficit hit 5.8 per cent in 2024, a figure eclipsed only by the US of all G7 economies. Former prime minister Francois Bayrou warned the France was “heading for bankruptcy” in the final address he gave to lawmakers before losing a vote of no confidence earlier this month.
A fifth of respondents said a government bond crisis was most likely to occur in the UK, with roughly half saying its debt was the second-most vulnerable to a sell-off behind France.
Survey stokes fears of UK debt crisis
The findings will compound fears that Britain is stuck in a vicious borrowing cycle, that has seen the government take on debt at the same rate as during the pandemic. The situation has led hedge fund billionaire Ray Dalio warned the economy was in a ‘debt doom loop’ that will plunge the UK into a pattern of rising taxes, higher debt and lower growth.
Dalio, who founded Bridgewater Associates, said in an interview that warning signs were “beginning to flash and flicker”, and the temptation to hike taxes on the wealthiest would force many to relocate overseas.
“A deterioration in conditions, as the financial problems and the social problems worsen, [is] having the effect of causing people with money to leave,” he said in an interview. “That’s a problem because – I don’t know the exact numbers in the UK, but they’re analogous to the US – 75 per cent of income taxes are paid by the top 10 per cent.”
Since the government’s maiden Budget in November, the yield on 10-year gilts – generally used as the main benchmark for a government’s capacity to borrow – has climbed over 40 basis points. It remains at elevated levels not seen since the Great Financial Crash caused global interest rates to plummet.