Market News

BY Chris Price

Britain and other major developed economies are heading towards a sovereign debt crisis as they struggle to get a grip on spending, a prominent economist has warned.

Gerard Lyons said the risks “might be starting to become more evident” in markets, as global bond yields rise around the world.

“Six of the G7 are heading for a debt trap by the end of the decade,” Mr Lyons told the Edelman Smithfield Investor Summit, referring to when debt becomes greater than the size of a country’s GDP.

“It matters more for France and Britain because both of those countries are more dependent on international investors to buy their debt.”

Government borrowing costs have climbed this week, with US Treasuries on track for their worst week in six months despite key inflation figures showing the US Federal Reserve’s preferred measure of inflation eased slightly in September.

Meanwhile, the yield on long-dated Japanese government bond yields – the return governments promise to pay buyers of their debt – hit record highs this week as its central bank indicated it will increase interest rates next week.

UK government borrowing costs have stabilised since Rachel Reeves more than doubled her fiscal headroom in the Budget.

However, Britain still pays a premium on its debt far above comparable economies amid concerns spending could ramp up again.

Mr Lyons, chief economic strategist at Netwealth, which manages £1.3bn of client money, warned Britain had shown the difficulty of getting public finances under control, running only seven budget surpluses since 1969.

“It’s very difficult for governments to get themselves in a position, when they’re in a debt trap, to stabilise it,” he said.

“And it’s proving difficult to actually stop us heading in the direction of a debt problem. So debt is really coming to the fore.”

He added: “We’re in an environment where Western democracies seem incapable or unable to address the underlying issues that are causing debt to keep on rising.

“So a debt crisis I would say is likely by the end of this decade but we might start to see that, as we started to see with France a few months ago, factored into market thinking much sooner.”