"...gilts are IOUs issued by the government over periods of 5, 10, 30, and 50 years and bring a guaranteed interest payment for the buyer, paid every six months. Two thirds are held by pension funds, as they supply a ready and predictable source of income. Once issued gilts can be traded, so their price can go up or down compared to the interest rate guaranteed. Out of this relationship you get a yield - which is a bit like a "real" interest rate. If the price of gilts goes down, because there's not enough demand, the yield goes up - and the government effectively ends up paying a higher interest rate on its debt."
2. Sorry, I'm struggling to say awake here - why does that matter? Alice reckons it matters because:
"Even under the best case scenario, New Labour has bequeathed this country a decade of historically unprecedented fiscal problems. In the worst-case scenario, the UK could be slipping towards a fiscal crisis, where financial markets question the long run solvency of the UK government and refuse to finance this profligacy."3. Blimey, that sounds scary - is it likely? Chris doesn't think so:
"The most important number about today’s Budget is $12.5 trillion. That’s the amount of money the private sector is likely to save around the world this year. This means that the government can raise the £220bn it plans to borrow in the gilt market merely by attracting 2.5 pence for every pound saved**. This is smaller than the share of the UK in the global economy..... the world has a shortage of safe liquid assets. Issuing gilts therefore meets global savers’ needs. This is why the UK - and governments of developed countries generally - has enjoyed very low borrowing costs as debt has soared."4. Phew, so I can rest easy then? I mean, the FT says we're so safe we're rated AAA:
"As Moody’s says in its overview of sovereign ratings:The probability of default for a government depends on both the ability and willingness to pay.5. Ah. I think the penny's beginning to drop here. So that's what Willem Buiter was on above when he said,
Countries with long-term, firm financial systems that lock them firmly into the global economy are, of course, much more “willing” to pay than those without them.
Or to flip all this seeming optimism around: the UK won’t lose it’s triple-A rating because Moody’s knows the government would rather cut public spending to the bone first."(My emphasis)
"The long-term pain of higher taxes and lower public spending is not the result of public debt and deficits incurred because of a war fought by a united nation against a hated external enemy. It is the result of an economic civil war, a massive systemic peacetime economic failure, with a large domestic component. It is therefore not clear that the necessary social and political cohesion - readiness to accept joint fiscal burden-sharing - will be present. If the necessary fiscal tightening is not forthcoming because different groups and vested interests are engaged in a war of attrition aimed at shifting the fiscal burden to the other guy, markets could easily panic and Britain could face..... the rest of the world withholding financing from its public and private sectors."