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Has Alistair Darling shot himself in the foot?

Last weeks sharp sell-off in the UK gilts market was one of the most severe seen in recent years and is a perfect reflection of the confusion and concern in the debt markets. In simple terms, the gilt market is the area where the UK government issues debt instruments to raise money in the short, medium and longer term to finance budget deficits and sovereign borrowings. So what is going on?

After the publication of the UK government's pre-budget report last week concerns began to materialise regarding the lack of clarity about how the UK government plans to tackle the £175 billion plus budget deficit. There is also the issue of debt repayments on the UK government's £1 trillion plus debt pile which will need to be financed in the short to medium term. Many now believe that Alistair Darling will hold off from any major moves on the debt pile until after the election so as not to prompt any more concerns for the UK electorate.

However, last week saw the yield on gilts rise by up to 1.5% which will ultimately see the cost of debt for the UK government rise in the short to medium term until we see a credible plan of action. In many ways, Alistair Darling's insistence on remaining coy about details of the debt repayment plan has backfired although in many ways he is stuck between a rock and a hard place and unable to take any unpopular action before the next general election.

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