A verdict?

The reaction to the Darling show yesterday on the part of the newspapers was universal - they had all seen through it all, and there will doubtless be more scandal when the IFS delivers the results of its calculation later today.

Early to day there was a muted response by the stock markets. They had probably taken account of the PBR, which had been heavily leaked. (Will the government try to trace the leaker?)

The bond markets are different, where gilts are now taking something of a hammering. This was perhaps due to the information from the debt management office, something that the chancellor had neglected to mention. By the end of this financial year the DMO will have looked to borrow £243 billion, rather more than was suggested by the chancellor's expected deficit of £178 billion.

The result was that 10 year gilts fell 13 base points, the largest quick fall for some time, and they now stand at 63 bps above German bonds.

Credit Default Swaps also show the same picture. To insure $10 million of UK debt against default now costs $85,000, compared with $24,000 for German debt. This is a record high multiple, and may trigger reactions elsewhere in the financial system.


There is thus a warning, which the credit agencies will have noticed, that the UK may find it difficult to borrow the further money Darling was hoping to borrow over the next few years. The fear that ever higher debt might lead to higher rates is a real one, and could nip any recovery in the bud. It rather supports what Osborne has been saying.

Of course, although there was no other economic news which could have spooked the market, it is possible that rumours were circulating, and in time dealers may come sheepishly to their senses. This is a desperate hope!