Failed bond hits Brown's plans to beat the recession

Markets force Prime Minister on to defensive over second fiscal stimulus

Nigel Morris,Sean O'Grady
Thursday 26 March 2009 01:00 GMT

Gordon Brown is facing embarrassment over his economic rescue plans after an attempt by the Treasury to raise more money through an auction of bonds failed because of worries about Britain's level of debt.

The increasingly limited room for manoeuvre available to ministers was made brutally clear yesterday when a sale of government bonds, known as gilts, failed for the first time in seven years. The Debt Management Office, which is responsible for funding government borrowing, could not find buyers for the whole of a £1.75bn batch of bonds. Subscribers could only be found for 93 per cent, a low take-up by recent standards.

The rejection of the government bonds came after Mervyn King, the Governor of the Bank of England, issued a stern warning to the Prime Minister not to push Britain further into the red in next month's Budget.

Mr Brown's domestic problems piled up as ministers played down the prospect of a landmark agreement to pump money into the beleaguered global economy at next week's G20 meeting of world leaders in London. He was forced to deny suggestions of a split between the US and Europe over the issue after one EU leader condemned President Barack Obama's recovery package – endorsed by the Government – as the "way to hell".

Detailed work on the Budget – to be announced on 22 April – will not begin until the outcome of the G20 summit becomes clear. The major dilemma for Mr Brown and Alistair Darling, the Chancellor, is whether to press ahead with a second fiscal stimulus just five months after £20bn was injected into the British economy.

The bonds snub suggests that whatever the Government's plans, the markets have already decided that the UK is borrowing too much. "This is a warning signal investors are sending to the Government," said Neil Mackinnon, chief economist at the hedge fund ECU Group. "Investors are giving the thumbs down to the gilt market."

Others in the market suggested that Mr King's remarks about borrowing could have "spooked" the markets. There is also evidence of longer-term worries about resurgent inflation and nationalisation of fragile British banks.

Mr Brown arrives in Brazil today on the third leg of his 17,600-mile tour to win support for the summit, but the trip has so far been overshadowed by events in Britain. Speaking in New York yesterday, the Prime Minister pointed out that the Governor had signed a communiqué of G20 finance ministers agreeing to take whatever action was necessary in the downturn.

President Obama has called for all big economies to contribute to "important steps to lift everybody up" – seen as a rebuke to nations such as France that are resisting a global fiscal stimulus.

Mr Obama's comments brought a furious response from Mirek Topolanek, the Czech Prime Minister, who holds the EU presidency, and who said Mr Obama's plans were a "way to hell". British officials said last night that he "did not speak for Europe".

Mr Brown insisted there was "far more agreement" ahead of the G20 summit than had been claimed, but he acknowledged it was too late for individual nations to rewrite their budgets to coincide with the London meeting.

Mr Brown made a scorching attack yesterday on the banking industry in a speech to Wall Street financiers including the presidents of Citibank, Nasdaq and Goldman Sachs. Values such as "honesty, integrity and working hard" may have been absent from global financial systems, he said.

"There is a sense that the global economy was outside these standards that we applied in our everyday lives," he said. "A world without standards is going to be a world without stability. Markets depend on morality in the end. We have to clean up the banking system. I know that people are angry at what they see in banking bonuses and remuneration."

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