The British Government borrows money by selling bonds, the bonds are known as ‘gilts’. Approximately £120 billion a year, the UK Government is borrowing to meet the short fall in tax revenue and government expenditure. (the budget deficit)
These GILTS are sold at regular auctions held by the UK Debt Management Office (DMO), to raise money for the UK Government, HM Treasury. These bonds are then traded on the bond market.
The DMO publishes a quarterly report that shows who currently owns the UK’s debt, summarized below.
39.8% Insurance Companies and Pension Funds
35.1% Overseas Investors
17.8% Other Financial Institutions
Although the majority of gilts are held by British institutions, as you can see from the table above, 35% of our creditors are overseas investors. Thus effectively we are depending on the confidence of foreign investors to lend the UK money, and for the creditors to get their money back. The risk going forward is that once the UK gets into even more debt, confidence in the ability of the government to repay the outstanding debts falls.
The best analogy is in day to day life, would one like to lend money to a heavily indebted person ? The risk of getting one’s money back always increases when carrying a lot of existing debt.