UK sovereign debt worries ease despite election fears

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The Independent Online

Even as Portugal and Greece are being punished by markets for their fiscal incontinence, the UK, with almost as large an annual deficit as Greece, and one larger than Portugal, seems to be faring much better.

Fitch Solutions, the research arm of the ratings agency, said yesterday that an analysis of the credit default swaps market revealed a narrowing of yields in recent weeks, even though the prospect of no party having an overall majority on 7 May grows more likely.

The Fitch analysis appears to contradict claims by the Shadow Chancellor, George Osborne, that there is a "clear risk of economic paralysis, higher interest rates and a loss of market confidence" if the election results in a hung parliament.

Thomas Aubrey, managing director of Fitch Solutions, and one of the authors of the report, said: "This sharp positive reversal in CDS trends for the UK suggests CDS investors now do not expect any significant increase in UK government bond yields, regardless of the possibility of a hung parliament in early May."

The CDS spread is the cost of insuring UK government debt against default. It has now narrowed dramatically, as has the differential between the yield on gilts against equivalent German bunds, regarded as safe investments. They are now slimmer than when the Conservatives' poll leads were much wider.

Fitch Solutions, a separate division to the ratings arms, is the latest in a series of City voices contradicting the Conservative view that a hung parliament would lead to chaos in financial markets, a sterling crisis and soaring interest rates.