Mike Newton was Conservative parliamentary candidate for Wolverhampton West, and worked for the Bank of England during his career in the financial markets.
Late last week saw a series of developments in bond markets that lead to the conclusion that a crisis is happening now, and not at some indeterminate point in the future.
Given the visit of the Bayeux Tapestry to London, it would be ironic if France proved to be the catalyst that dragged the UK over the edge.
On Friday the markets lost significant confidence in France’s government bonds, after the Finance Minister, Roland Lescure, noted that it was in severe budget crisis and aggressive spending cuts would be needed in 2027.
Market confidence in French debt has been deteriorating for some time. On Friday the much watched ‘spread’ between French and German government debt widened to over 1%, the highest in fourteen years. This means that Germany can borrow at one percent cheaper than France. (Monetary union was meant to avoid such wide distortions, but that topic is for another day.)
The spread between France and Greece also widened, to a recent record of over 1/4 per cent. I spoke on Friday to a top IMF official about this, given the Fund’s role in Greece, and the response was that it was ‘unsurprising’ that France was losing investor confidence, and that the UK needed to rapidly fix its own problems to avoid a similar outcome.
France has failed repeatedly to control public spending, recording a budget deficit of 5.1 per cent of GDP in 2025 and a projected 5.4 per cent in 2026. The government plan to find €54b of savings is struggling to survive contact with political reality.
(It was ironic that M Lescure was telling Ireland this week it needed to share around the EU its revenues from technology businesses. Whoever would have thought that France would end begging Ireland for a ‘sub’?)
Bond markets very rarely move in isolation, and if the market is finally waking up to the gravity of the situation in France, the UK may have a very limited window to get its house in order.
Gilts have had a very bad run, on both an absolute and relative basis. The metrics for the UK’s debt are almost as bad as France’s, and we have recently seen interest rates in certain key gilt markets at or close to their highest since the 1990s. It now costs 5.3% for the Treasury to borrow for ten years, versus 4.1 per cent at the time of the general election.
And if that was concerning enough, the markets do not trust the Bank of England on inflation and are forecasting a bank rate of nearly 5% a year from now. That is almost five hikes from where we are now.
All this is obviously passed on through higher mortgage and business borrowing rates to the real economy. Imagine owning a hospitality business or looking to refinance a mortgage in this environment.
The criticism by Burnham adviser Andy Haldane of UK fiscal policy was one of the most devastating interventions I have seen in over 25 years in the markets. I know Andy from my Bank of England days: he is a careful and thoughtful communicator, as well as being a man of high integrity.
It is stunning therefore that he described Burnham’s administration as a ‘traditional tax-and-spend socialist government with better TikTok’. (The PMs other top adviser, Jim O’Neill, was as critical but used more discrete language.)
When your own advisors say that you are incompetent, less than three months after you started, it does not require a Nobel Prize to work out that something is seriously, systemically wrong with policymaking. Investors have noticed this. Socialism does not sell bonds.
The risk here is that if the French cannot recover market confidence, concern about other vulnerable countries like Britain will escalate. And given how high the tax burden already is in both Britain and France, this recovery in confidence can only come from rapid reductions in public spending.
The role of the Bank of England is particularly interesting here. Last week it put in place some highly technical measures to reduce the supply of gilts it sells into the open market under its ‘Quantitative Tightening’ programme.
These were designed to prop up the gilt market and were essentially a one-shot move to correct the sell-off. It may be coincidental that it is most helpful to the government if yields were to drop during the OBR pre-budget window on which assumptions are formed.
It worked for a day before benchmark 10-year gilt yields had moved back up to levels before the BoE’s intervention. It could be that the Bank is forced to raise interest rates very soon to protect the gilt market, which would obviously slow the economy down sharply.
There are global factors affecting bonds such as the rise in the price of oil, and US fiscal incontinence (America has a budget deficit of 6 per cent of GDP) but using these as excuses are unconvincing.
The Labour government made fiscal choices and is now seeing them unravel as global conditions become less favourable. To pretend it is someone else’s fault is like a sailor complaining about the sea.
Nor is it anything to do with Liz Truss, whom opposition commentators still invoke in a way that increasingly reminds me of a husband still complaining about his ex-wife twenty years after their divorce.
The Shadow Chancellor, Andrew Griffith MP, understands very clearly that public spending must be reduced, and the state needs to shrink. He is setting out this distinctly Conservative view step-by-step, but the destination and message are clear: fiscal stability is a function of lower spending.
He may be proved right quicker than anyone expects.