Gilts tumble as PBR intensifies downgrade fears – papers

Gilt prices fell sharply yesterday as investors began to digest the Government's pre-Budget report and fears that Britain's credit rating will be downgraded intensified.

Yields on 10-year gilts jumped 14 basis points by close of trading as confidence in Government debt spiralled downwards, dragging prices down with it, the Independent reports.

The gilts market is also pricing in fears Alistair Darling's forecasts for recovery are over-optimistic, and his spending cuts too little, to manage the huge public deficit.

Further problems for the gilts market lie in the Chancellor's hazy promise to halve annual borrowing to 5.5% of GDP in four years with little detail about where the extra money will be found instead.

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Britain and the US are not at risk of a credit rating downgrade right now, but a worst case scenario foresees a cut by 2013, say analysts from Moody's Investors Service.

The comments following the PBR reiterated an analysis from the ratings agency released on Tuesday, helping to lift the pound to session highs, Reuters reports.

"Only the UK and the U.S. are classified as 'resilient', rather than 'resistant'. Their resiliency will be tested in the next couple of years, but for now they have a high degree of financeability and debt affordability," the analysts said in a presentation.

"The rise in debt and higher interest costs could test the ratings under some scenarios, but not right away."

Moody's analysts said they did not expect either country to lose its "Aaa" rating but this depends on how quickly interest rates rise over the next few years and debt financeability - the ability of a government to raise a large amount of debt in its own currency without paying punitive rates.

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Fixing Britain's finances will cost every family £2,400 a year and lead to public spending cuts of almost a fifth, leading economists have warned.

An analysis of Alistair Darling's Pre-Budget Report concluded his postponed cuts would see 19.2% slashed from budgets for transport, universities, defence and housing after the election, reports the Daily Mail.

The Institute for Fiscal Studies thinktank also said families with one earner and children - and anyone earning more than £35,000 - would be worst hit by the tax rises Labour has announced so far.

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