>Gilty secret


An interesting graph on the front page of the Financial Times shows the turbulent history of Britain’s 20th century finances through the yields of UK Gilts. The graph serves to illustrate the relatively benign treatment of the UK’s current sovereign debt. Whilst Britain is hardly in the most robust fiscal condition it is being compared to the Eurozone and the USA. A decisive government decision to tackle deficits and debts contrasts with jitters over Eurozone stability and US political wrangling, and sees the UK joining Switzerland as a relative safe haven.

In mid-August, UK ten year bonds were trading at a yield 2.24%, marking the lowest yields on UK sovereign debt since the 1890s. This contrasts with their peak in the mid 1970s and early 1980s, when they pushed above 14%. They shot up to these heady heights amidst the IMF bailout of the UK and the abolition of exchange controls, and were triggered by the collapse of the Bretton Woods system of fixed convertability when the US ended dollar convertability of gold on 15 August 1971.

Yields then generally declined from double figures down to last month’s long-term lows, with a temporary spike above 12% in the early 1990s recession. The comparatively benign outlook from the 1890s ended in 1900, when yields would drift up towards 6%, spiking after the conclusion of the First World War. The fiscal trauma of that conflict did not have as devestating a consequence on UK yields as later recessions, and the Second World War was even kinder, with yields drifting back towards 2%.

Whilst the graph vividly demonstrates that UK borrowing was, historically, much more expensive (sometimes eye-wateringly so). Given the size of the UK debt and the punitive measures being taken to tame and reduce it, it has to be hoped that they continue to reflect the late 19th rather than the late 20th century.