Gilt trip

29 September 2022/1 Comment
By Nick Dunbar

For years, it was OK for developed countries to borrow as much as they liked, until suddenly the UK showed it wasn’t. Last week’s reckless budget by chancellor Kwasi Kwarteng brought a long-awaited reality check, and worse still, threw a wrecking ball into what was a stable source of investor funding: the gilt market.

We’ve written before about the gross financial need (GFN) metric, devised by the International Monetary Fund to assess sovereign debt sustainability. It’s a forward-looking measure, combining three things over a 12-month horizon. Consider the chart below.

Future borrowing before Truss became PM Future borrowing after Truss became PM

Firstly, the yellow bars are the forecast primary deficit, the difference between the IMF’s estimate of government expenditure and revenue over this period, expressed as a percentage of GDP. The blue bars are the amount of maturing sovereign debt that needs to be repaid in the next 12 months, as tracked by our sovereign debt tool using Markit iBoxx data. Finally, the red bars are the total interest payments that the countries need to make on all outstanding bonds during this same period.

In our visualisation, we have taken 15 of the world’s largest economies and ranked them in order of decreasing GFN – the sum of the yellow, blue and red bars. Before Liz Truss became UK prime minister, the UK ranked 11th on this list, between China and Canada. That was a comfortable place to be, allowing Britain to borrow at rates of around three per cent, and even less than that for longer maturities, where the gilt yield was almost the same as it had been in December 2015, before the Brexit vote.

Then on 6 September, Truss entered Downing Street, followed by her new chancellor Kwarteng. By clicking the button above the chart, you can see what happened next.

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