UK ranks second in major debt risk

The UK is the second most likely major economy to experience a debt crisis within the next two years, according to a recent survey of financial professionals. Investors remain sceptical about the country’s growth prospects and efforts to manage spending effectively.

A Deutsche Bank poll released on Monday revealed that France is the only major economy more likely to encounter a bond crisis before 2028. The UK ranks ahead of debt-laden Japan and the United States, which is currently grappling with a $1.8 trillion deficit.

More than half of the institutional investors surveyed identified France as the most likely nation to face a crisis-level bond sell-off. The country is embroiled in a political deadlock over fiscal policy, which has led to the resignation of three prime ministers unable to secure agreement on a budget. France’s deficit reached 5.8% in 2024, surpassed only by the US among G7 economies. Former Prime Minister François Bayrou cautioned that France was “heading for bankruptcy” in his final address to lawmakers before losing a vote of no confidence earlier this month.

A fifth of respondents indicated that a government bond crisis is most likely to occur in the UK, with about half considering its debt the second-most vulnerable to a sell-off after France.

The findings intensify concerns that Britain is caught in a relentless borrowing cycle, with the government accruing debt at rates comparable to the pandemic period. This situation has prompted hedge fund billionaire Ray Dalio to warn that the economy is in a ‘debt doom loop’, potentially leading to rising taxes, increased debt, and lower growth.

Dalio, founder of Bridgewater Associates, noted in an interview that warning signs are “beginning to flash and flicker”, suggesting that increased taxation on the wealthiest could drive many to relocate abroad. “A deterioration in conditions, as the financial problems and the social problems worsen, [is] having the effect of causing people with money to leave,” he stated. “That’s a problem because – I don’t know the exact numbers in the UK, but they’re analogous to the US – 75% of income taxes are paid by the top 10%.”

Since the government’s initial Budget in November, the yield on 10-year gilts, often used as a benchmark for a government’s borrowing capacity, has risen by over 40 basis points. It remains at elevated levels not seen since the Great Financial Crash, which caused global interest rates to plummet.