英国债务危机与债券市场动荡

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Aluminum is ubiquitous. And now it's caught in between Trump tariffs and a war in Iran. But we start with the drama that is politics in the United Kingdom as the fifth [music] Prime Minister in eight years is fighting to avoid yet another turnover at number 10. And the markets are keeping score. How much say does the gilt market have in who gets to run the country? John Authers is Bloomberg's senior editor for markets. [music] So John, there's a lot of political upheaval drama playing out in the United Kingdom right now.

At the same time, bonds are selling off gilts. The yields have gone up. Is there a connection between the two and if so, what?

Yes, there's certainly a connection which is that Britain has even more than where we are here in the US, the rest of the Western world, it has a fiscal problem. We don't have much headroom left to spend money in the UK. Any sign of concern about political instability will in its own right worry bond markets and specifically the moment because Kier Starmer is in a lot of political trouble any Challenger even those who you could argue are to his political right will want to do something to show they've made a difference once they take over from him and that's going to involve spending some more money on something that's going to involve being more lenient on fiscal policy than labor has been so far.

So plainly the risks are towards more fiscal spending. That's plainly something the guilt market dislikes. There's a long history of friction between a labor government that yeah has its uh origins in in socialism and the unions and bond markets naturally.

There is also a more recent history between the conservative government and the bond market. Read Liz Truss. We remember that but one of the things you pointed out in one of your columns is actually the yields on gilts right now are above where they got to under Liz Truss.

Exactly. I mean that there are uh to be fair to the current labor government there are reasons for that in that interest rates have risen across the world since then and what really can endanger a financial accident is when yields rise very fast which is absolutely what happened under under Liz Truss. She she took the market by surprise and uh and thereby slipped on a banana in whereas what we've got at the moment is more of a slow motion car wreck with labor.

But yes the the ultimate fact is is true. The the uh uh the higher the yields go and they are now even higher than than uh when they toppled Liz Truss the the less room for maneuver any government has uh and to some extent this is a this is a systemic problem for the UK because as we've just said that Liz Truss was a was and is a conservative. This is universal across the parties a certain lack of trust. Uh, and the British two-party system is breaking down at present.

Uh, and both Greens who are basically a British version of the the AOC Bernie Sanders left and the Reform Party of the Nigel Farage who are obviously very similar to the the Donald Trump Maga right. Both of those are on the face of it more inclined to splash money around and do things that the bond market really dislikes than the incumbents. There's a a very worrying dynamic about the entire British political situation.

Uh, or at least it's very worrying if you're a if you're a gilt investor.

We know from your column that you are a student of popular music. And I don't know if you remember the Aretha Franklin song Who's Zoomin' Who?

Yes, that's the the 1985. I remember that. That was That was actually my first time in America. But anyway, carry on.

But but if you take the bond market, the gilt market on one hand, and the political system on the other, who's zoomin' who? I mean, you've explained how the the political turmoil can affect the gilt market. Is the gilt market affecting what's going on in politics as well?

At the moment I I mean, certainly in the Liz Truss incident, yes. That was very much the case that it was the bond market that basically said, "No, you can't do this." And forced the the expulsion of first the Chancellor and then the Prime Minister herself. This time around, that's less clear. You could certainly say that at this point the the bond market has become a kind of a sheet anchor or a straitjacket for whoever is in charge.

But it will be more uncomfortable for a you know, a party of the left that actually has fewer hang-ups about spending taxpayers' money. Um, but you know, the the overall the overall position is is difficult either way. Uh, Uh, the other thing that's quite interesting compared to history is that it used to be uh, the currency market. So, Harold Wilson have been forced to devalue in the pound and then going on television to say that the the pound in your pocket, of course, isn't worth any less, which absolutely wasn't true.

And then Labour government of the '70s being forced by run on the pounds to to to to go to borrow from the IMF. And John Major's government basically never recovered from uh, the Black Wednesday attack on Sterling by George Soros and others. So, it used to be the currency market that really inflicted pain. Uh, and now that currencies do tends to float more gradually, more more more easily, and now that we've had many years of being used to extremely low bond yields, that you know, cheap money is being treated as a fact of life or a birthright almost, it's the bond market that has now taken over as the anchor, the great limitation.

The United Kingdom has a historically high ratio of debt to GDP, but they're not alone in that. They may be a little bit more than some of the rest of us, maybe a little less than some as well. Uh, is what we're seeing in the UK simply what's going to happen in other parts of the world, including the United States, just sooner?

Yes, there's a reason that the UK has more of a problem or more of an instant problem, uh, which you can explain easily enough from geography and history. The UK is an island which got rich by trading with other people. The US is basically a continent that got rich by trading with itself. So, exports have always been a much more important part of the uh, the UK equation. When you have uh, pressure on the currency, when you have inflation elsewhere, it will affect the UK much much more swiftly, much more dramatically.

It has it is much more dependent on the generosity of others than than the states. That said, um America's share of GDP debt public debt as a share of GDP was in round numbers 20 years ago before the global financial crisis 60%. Causing you know occasioning great alarm, the Simpson bowls if you remember that, attempts to cut the deficit. It's now 120. Um and whatever you think of uh the the relative merits of Joe Biden and Donald Trump, both of them spent money whether through tax cuts or uh fiscal largesse or both in a way that suggested that that this just wasn't an issue.

Uh it will become an issue at a time. Um the US is a is a bigger more closed economy than the UK. It can and it has the exorbitant privilege of of the dollar. It doesn't It's not as It's not disciplined by uh by potential runs on the currency like the UK is. But ultimately if you're borrowing more than you have and can't generate the money to repay it, you're either going to get very bad inflati

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