Analysts are sounding the alarm bells over a potential debt crisis reminiscent of the Truss era, as Britain’s financial markets face turmoil with the possibility of the Labour party veering to the Left.
On a day of market anxiety, the UK’s borrowing costs have soared to levels not seen in 28 years. This financial upheaval is fueled by the speculation that Keir Starmer could be replaced by either Andy Burnham or Angela Rayner, causing traders to react with unease.
Adding to the economic concerns, the British Pound has weakened against both the US dollar and the euro. Moreover, the FTSE 100, a key index of blue-chip companies, has taken a hit, reflecting the broader uncertainty.
Despite coming to power two years ago with promises of ushering in a new era of stability, the Labour party now finds itself embroiled in internal conflict. This follows a challenging local election period that has weakened the Prime Minister’s position.
Within the party, debates are intensifying over when to choose a new leader. Supporters of Blairite candidate Wes Streeting are advocating for a swift leadership contest, believing it will enhance his chances of success.
Conversely, the Left faction is pushing to retain Keir Starmer until September. This delay would provide an opportunity for Manchester Mayor Andy Burnham to re-enter Parliament and potentially vie for leadership.
Allies of Mr Burnham told Sky News that they will ‘not accept another London leader’, as they battle to control the party’s future direction. The Left has been darkly briefing that they would try to oust Mr Streeting even if he does become PM.
The Labour Left wants to keep Sir Keir in place until September, so Manchester Mayor Andy Burnham has a chance to become an MP again
Factions are wrestling over the timetable for appointing a successor – with supporters of Blairite Wes Streeting believing a quick contest is his best chance of victory
Extraordinarily, the Left-wing Tribune group of more than 100 MPs has chosen this moment to call for less ‘caution’ on fiscal policy.
Former minister Louise Haigh, who chairs the group, said the current fiscal rules ‘resolved in favour of caution’. She also demanded big tax rises on wealth.
The yield on 30-year UK Government bonds – known as gilts – jumped to 5.807 per cent in morning trading.
That was the highest level since 1998.
The yield on 10-year gilts also rose back above 5 per cent, lifting by 10 basis points to 5.11 per cent – although that is below recent highs last month.
Part of the move is down to the Iran war turmoil, but the UK has been worse hit than other countries.
Sterling also weakened further while stocks on the London market dropped sharply on rising oil prices.
Sterling fell 0.6 per cent to 1.35 US dollars and was 0.2 per cent lower at 1.15 euros.
The FTSE 100 Index shed more than 1 per cent in opening trade, later settling 95.57 points lower at 10173.86.
Nigel Green, chief executive of deVere Group, said markets feared the Government will abandon its fiscal rules designed to keep debt under control.
‘It seems gilts are pricing in the exit of the Prime Minister,’ he said.
‘When you see 30-year yields at levels not seen since 1998, that question is being embedded into pricing.’
He added: ‘Rachel Reeves introduced fiscal rules designed to anchor credibility. The problem now is that markets are questioning whether those rules can be maintained unchanged if political pressure intensifies and borrowing costs remain elevated.’
Chris Beauchamp, Chief Market Analyst for the UK at trading platform IG, said: ‘There is no clear plan for what comes next, but markets are already pricing in a new PM who will open the floodgates on spending despite the UK’s dangerous fiscal situation.
‘Faced with hordes of Labour MPs worried about their re-election chances as Reform surges, a new PM will find it very hard to resist calls to spend more money in order to shore up their embattled party.
‘Much of the case for the UK as an investment destination rested on the Starmer-Reeves commitment to fiscal rectitude, but it is unlikely that a new leader from the Left of the party would feel bound by such promises.’
Cathal Kennedy, senior UK economist at RBC Capital Markets, told Bloomberg: ‘I think this morning there is a 2022 feel toward this, with the Prime Minister carrying on as normal while all indications show he has lost his authority in the party.’
Craig Inches, head of rates and cash at Royal London Asset Management Ltd: ‘The market is now pricing almost four rate hikes for the UK which it can’t withstand.
‘Whoever replaces Starmer will not be able to borrow more money via gilts regardless of what they say.’
