Is Britain going bankrupt? Inside the DMO

For ordinary Britons, and companies, the credit bubble is as much a matter of history as the Tulip bubble.

For governments, however, the credit boom is only just beginning. And Robert Stheeman is about to start running the biggest overdraft in British history. Mr Stheeman is the chief executive of the Debt Management Office, the government arm responsible for funding deficits.

I interviewed him last week – before today’s news that the UK faced having its credit rating downgraded for the first time since the second world war:

In 2000, just after the DMO was created, it had to raise just £10bn. Mr Stheeman has just started a series of weekly auctions designed to raise a remarkable £220bn this year, as the tax take collapses and spending on benefits increase. In the next four years he is estimated to have to raise £670bn as the recession bites.

In a remarkably frank interview Mr Stheeman admits that it’s a huge challenge:

“It is a major one, and the numbers are extraordinarily high, I wouldn’t want to pretend otherwise. At the same time we do have one big advantage and that is that the major government bond markets have become extremely liquid and extremely efficient…. and I’m often asked: can the markets take this – and the answer is, yes it can… I’m genuinely confident that it will be doable and that everything that makes our market work not just ourselves but the banks who help us sell our debt and whole investor community, domestic internationally will support the programme,” he told me.

Last week the Bank of England governor was more or less asked, now that the government has saved the banks, is Britain going bust?

Well it’s Robert Stheeman who is first port of call on that. He will oversee around 60 debt auctions. About a third of that debt is currently bought by foreign institutions, about which he says, “in general the message is quite clear they are comfortable with their holdings in gilts”.

Around half is lent to the British government by domestic savers via their pension funds. The first tangible sign that these huge levels of borrowing are becoming problematic would be an Irish-style downgrade to Britain’s AAA credit rating. Surprisingly perhaps, Mr Stheeman told me that this would not necessarily be a problem.

“A credit rating is a significant factor, looked at by international investors in particular, at the same time a credit rating is ultimately just that, its an opinion by the credit rating agency. I don’t think it would fundamentally change the way international investors view our debt, it could mean they might demand fractionally more in terms of yields, [but the difference] could easily be imperceptible,” he said.

He admitted that the cost of paying the interest on government debts was shooting up: “I don’t see it turning into spiral, but it is getting significant, a significant part of government spending.”

Some international investors, like Jim Rogers, who I interviewed earlier this year, have raised the prospect of Britain not being able to sell gilts. When I asked the man charged with actually selling the gilts if he was worried, he said: “Genuinely not,” describing “huge interest” in his auctions.

So there we have it. Quadrupling Britain’s overdraft – no problem. What Mr Stheeman seems to be saying is that whatever the level of borrowing required by the government, it can be accommodated – at a price, because the market for government debt is so efficient.

But that raises two questions: have we really “run out of money” as some politicians suggest? And might there be another reason for the DMO’s relaxed vigilance? More later.

UPDATE – Today the ratings agency Standard and Poor’s said there was a one in three chance the UK’s credit rating would be downgraded. See the report on tonight’s show at 7pm.