U.K. Haven Status Threatened by Growth, Euro Woes, Barclays Says

Britain’s status as a haven amid Europe’s debt turmoil faces threats from a poor economic outlook and the risk of a disorderly breakup of the euro, Barclays Capital said.

While there is some justification for the near record-low yields on U.K. government bonds, confidence could be damaged if the economy again proves weaker than forecast as concerns mount over the buildup of government debt, Barclays economist Simon Hayes said in a report released in London today.

“Investors might then begin to question more seriously the economy’s longer-term growth capacity and the feasibility of achieving a stable and manageable level of public debt,” he said. “Moreover, the government might find it increasingly politically difficult to maintain its austerity drive. Any hint that the government’s commitment to achieving a medium-term budget balance was waning would be likely to harm gilt-market confidence.”

Prime Minister David Cameron points to the bond markets as an endorsement of austerity policies that have stifled growth while shielding the U.K. from the concerns weighing on the euro area. His government is able to borrow (GUKG10) for 10 years at about 2 percent, compared with rates of 3.3 percent in France and 7.1 percent in Italy. Helping to hold down U.K. yields is a Bank of England bond-buying program aimed at boosting an economy forecast by the Treasury’s fiscal watchdog to expand less than 1 percent this year.

Euro Shocks

Hayes said shocks from a disorderly breakup of the euro area could prove “unmanageable” and neither the Bank of England nor the Treasury have much scope to provide extra support to the economy. “A pronounced hit to business and consumer confidence would be likely,” he said.

U.K. government debt is set to rise from 76 percent of gross domestic product currently and peak at above 90 percent by 2015, a level “not out of line with other comparable economies,” he said.

Britain’s debt burden would only fail to stabilize if among other factors gilt yields rose persistently above 5.2 percent and economic growth stayed below 0.6 percent, Hayes said. “These critical values are generally some distance from outturns that we would consider plausible,” he said.

To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net.

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