The U.K. is a “safe haven” for investors shunning the debt of Greece and other European nations because of the perception that Britain’s next government will cut the record budget deficit, economist Roger Bootle said.
“Gilt yields have been falling in reaction to the crisis,” Bootle, founder of Capital Economics Ltd. and a former adviser to the British Treasury, said yesterday in London. “I think the U.K. is, relative to them, a sort of safe haven. It’s because of a long history of paying back our debts and I think a belief in the market that we will get to grips with this.”
Contagion from the Greek crisis swept through European markets yesterday, pushing up the borrowing costs of Spain, Portugal, Ireland and Italy while those of Britain fell. The U.K. votes in an election today where all three main parties have campaigned on their plans to cut the budget deficit.
“There’s got to be a real danger that, although we clearly aren’t Greece, this crisis builds,” Bootle said. “Crises do build this way. They move from small beginnings, sometimes distant beginnings. Greece to Portugal, and before not very long, Spain and Italy are under pressure, and then eventually the U.K.”
Bootle said that gains in U.K. government bonds show that investors are betting whichever political party wins the election will gain enough support to deliver a plan to reduce the budget shortfall.
“It’s quite remarkable actually the story of the past few days has been of a pronounced rally” in gilts, Bootle said.
The yield on the 10-year U.K. government bond, the country’s benchmark, dropped to the lowest level since December and the pound strengthened against the euro yesterday as opinion polls showed David Cameron’s Conservative Party may come closest to winning the election. Bond yields move inversely to prices.
The euro tumbled and the cost of insuring European banks against default rose to a one-year high after European Central Bank council member Axel Weber said Greece’s fiscal crisis is threatening “grave contagion effects” in the euro area.
Bootle spoke at an event hosted by the National Audit Office and the National Institute of Economic and Social Research.