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Who Will Buy All the UK Debt?

Patrick Allen|Senior News Editor, CNBC EMEA
Tuesday, 6 Oct 2009 | 3:37 AM ET

What the bond markets really want to hear from Shadow Chancellor of the Exchequer George Osborne is a credible plan for slashing billions of pounds in spending whilst at the same time not cutting off any economic recovery.

What voters in the UK want is a credible plan on how this will be done without hitting front line public services and without hitting them in the pocket via higher taxes. Osborne will want to do a bit of both whilst telling both investors and voters that this will be a complicated and at times painful process, but at the same time mixing in a dash of hope.

Conservative leader David Cameron has been criticized by many in the City and beyond recently for warning the UK could run the risk of a debt default. His comments, it was said, where not those of a prime minister in waiting and damaged confidence the UK on international markets. They had a point but anyone who has been long sterling over the last year would argue confidence was lost some time ago.

With a raft of US Treasurys set to flood the government bond markets in coming years, Britain will need a viable economic story to tell if it is to attract international buyers of its paper. Fortunately the Financial Services Authority may have come up with a plan that could help find some buyers whilst at the same time hitting lending to the real economy.

The plan is to force UK banks to hold an extra 110 billion pounds ($176 billion) in cash or bonds to reduce their reliance on short-term wholesale markets by 20 percent. That would of course raise appetite for UK government bonds, also known as Gilts, which the current UK budget deficit demands; but as Angela Knight from the British Bankers Association told Geoff Cutmore, the move will make it even more likely that banks will stop lending to consumers and businesses.

So do you back such a plan guys? Where will the cuts fall on government spending? Can you maintain front line services? Will you raise taxes on income or spending? And … how did Boris Johnson do all those interviews?

Osborne is going to have a busy day and so will CNBC. Join Geoff Cutmore and some great guests all day Tuesday from Manchester.