SLOG ANALYSIS REVEALS DOMINO-PROBLEM AT HEART OF LABOUR FISCAL POLICY

GOVERNMENT DEBT NOW MORE EXPENSIVE PER £ TO INSURE AGAINST THAN MAJOR UK BANKS

“Me?..the Chancellor?..bankrupt our banks?…are you completely mad?

The cost of insuring, Pound for Pound, against debt default is now higher for the UK Government than it is for our supposedly shaky banks. For HSBC, for example, the premium earlier this week was £60,000 per ten million; for the Government, it was quoted to The Slog as slightly over £70,000.

But there is a much bigger issue than this terrifying statistic: for as well as having been bailed out by taxpayer money, most of our banks are also holding huge amounts of Government Bond debt.

The U.K.’s big banks hold roughly £70 billion of U.K. Government securities. Both Alistair Darling and our financial regulators have sold banks hard on the concept of buying it as a way to meet new liquidity targets. But nervous credit managers in the know around the Globe fully expect European sovereign debt to spread to Britain.

In the best case, this will push up the cost of banks’ insurance against a U.K. default; in the worst case, New Labour’s leadership face the prospect of destroying Britain’s financial structure in order to win an election.

The best ‘reassurance’ Darling has given to date on his Budget is that it will “not be giveaway”. This is far below what credit agencies and managers are after in terms of action – but the running feud between Chancellor and Prime Minister on this issue has been well-documented both here and elsewhere.

The vicious circle would continue over time, as UK banks pay more for borrowing too – because their investment profiles would be viewed as that bit more dodgy.

“The UK’s Banks are effectively borrowing from, and investing in, a toxic sovereign risk”, a senior London-based credit manager told us late this morning.

The main brand potentially open to the problem is LloydsHBOS, with just under 50% of its sovereign securities in the UK Government. Having itself recently written off a vast amount of HBOS debt, it is already seen by many analysts as an unwieldy struggler. (It was also Alistair Darling’s idea to merge the massively debt-laden HBOS with Lloyds – to the fury of many of the latter’s shareholders.)

Related pieces: five lies behind the Northern Rock ‘progress’

Anyone seen a Tory analysis on this?