Britain now pays more to borrow than Greece: at the start of October, 10-year gilts yielded around 5.4% against roughly 4.5% for Greek bonds.
Little more than a decade ago, Greece was a basket case – at the centre of the Eurozone debt crisis. Yet markets are now demanding higher yields from Britain, prompting many commentators to conclude that investors see us as a greater credit risk.
But something doesn’t add up.
The same forces that allowed the UK to borrow at increasingly cheaper rates could go into reverse – and that’s exactly what they did
At the time Greece was collapsing, the UK was also in a very precarious situation. She had a deficit approaching 10% of GDP, the largest in peacetime history and the G20. Her debt-to-GDP ratio had almost doubled in just three years.
Still, the markets didn’t turn. Far from it. They fell over themselves to lend the UK money. It’s difficult to exaggerate how much of a safe haven Britain became – at one point, it was even cheaper to insure against a UK default than a German one.
Today, the deficit is a lot smaller – around 4% of GDP compared with 10% back then. The debt-to-GDP ratio is not dramatically higher compared with the later years of the Eurozone crisis – around 94% today against nearly 80% by 2013. More importantly, it is no longer rising at anything like the same pace. Indeed, the OBR forecasts that it will stabilise and eventually begin to fall as a share of the economy.
Yet we suddenly find ourselves paying more than Greece to borrow? So what’s going on?
It’s not that investors were ignoring Britain’s fiscal position back then – it’s that many other factors were weighing on their minds.
As the Eurozone crisis spread, Greece, Portugal and Ireland needed bailouts. It’s bizarre how a country running a larger deficit than at least two of the so-called PIGS suddenly became a safe haven for investors.
The explanation is threefold. First, the UK had tools these countries didn’t – such as being able to borrow in its own currency and having its own central bank, which could intervene in the markets. And that’s exactly what it did. The Bank of England cut interest rates almost to zero and launched a massive quantitative easing programme, buying government bonds on a huge scale.
The UK had something else that was rather unusual – an incredibly large private pension system. These massive pension funds created enormous demand for UK gilts, particularly long-dated ones, as they needed assets that could provide income to meet future commitments.
Finally, investors were desperately looking for somewhere safe to put their money, and Britain, with a large, liquid government bond market, looked relatively stable compared with the countries caught up in the Eurozone crisis. At points, demand became so intense that investors were accepting negative returns after inflation.
Cheap borrowing outlasted the Eurozone crisis. By 2020, 10-year gilt yields briefly fell below 0.2%, even as the pandemic sent government borrowing and debt soaring.
But the same forces that allowed the UK to borrow at increasingly cheaper rates could go into reverse – and that’s exactly what they did.
We’ve all heard the story that Liz Truss ‘crashed the economy’. But the forces that had created safe-haven Britain had already shifted against us. The Bank of England had been raising interest rates for some time to combat inflation. It had also started reversing quantitative easing through quantitative tightening (QT), allowing bonds it had bought to mature without replacing them and preparing to sell others.
Remember our unique pension system that propped up demand for UK gilts? Well, that went into reverse too. Some pension funds had borrowed to increase their exposure to gilts, but as gilt prices fell, they needed to raise more cash. So what did they do? They sold more gilts, pushing prices down even further. And so the vicious circle began.
And there’s a longer-term problem. As Damian Pudner has pointed out in CapX, Britain’s pension funds are no longer the dependable buyers of long-dated gilts they once were. The government increasingly has to find other buyers, who may demand higher yields.
The global appetite for gilts also went into reverse. After the financial crisis, investors sought the safety of government bonds across the world. That situation no longer exists as the private sector now offers more opportunities, particularly in AI and technology.
The mini-Budget undoubtedly made matters worse, causing an additional jump in borrowing costs as confidence in the government’s fiscal plans deteriorated. But this was about far more than Truss.
A gilt yield is far more than a credit score. In Britain’s case, it reflects the state of the global economy, investors’ appetite for private-sector risk, as well as national factors. Then there are the actions of central banks themselves.
We can see this in real time. In September 2026, the Bank of England changed its approach to quantitative tightening, slowing the pace at which it would reduce its gilt holdings. 10- and 30-year gilt yields promptly fell by around 0.1 percentage points.
Britain’s deficit had not changed. Its national debt had not changed. What changed was the market.
But none of this explains why markets are delivering a more favourable verdict on Greece.
Let’s be clear that Greece has earned much of its own recovery – returning to investment grade, running budget surpluses and even reducing its overall debt burden.
So are Greece’s lower yields evidence that they function as a fiscal scorecard? Well, not entirely, as the Eurozone of today is not the Eurozone of 2010. In response to the sovereign debt crisis, Europe built institutions designed to prevent the same thing from happening again. The European Central Bank now has tools to intervene when turmoil in government bond markets threatens the Eurozone.
And here is our final turn of the pendulum. The old Eurozone crisis drove investors towards UK gilts, but the new Eurozone looks a safer bet than it did back then. A crisis that once helped lower Britain’s borrowing costs has now helped lower Greece’s instead.
And here’s the irony. Despite Britain paying almost a percentage point more to borrow, S&P still gives the UK an AA credit rating compared with Greece’s BBB. So even S&P doesn’t regard Greece as a safer borrower than Britain.
The markets clearly aren’t giving us a simple verdict on Britain’s fiscal responsibility. But that doesn’t make our public finances irrelevant. On the contrary. The forces that once allowed Britain to borrow so cheaply have largely gone into reverse, and there is little reason to expect them to return any time soon.
Those who argued that austerity was a choice, and that Britain could afford to borrow more when interest rates were exceptionally low, had a point. But there was always a catch. Much of the debt would eventually have to be refinanced at potentially much higher rates. That is precisely the situation Britain faces today.
So does all this vindicate the cheerleaders of austerity? Not exactly. They were right to warn against becoming too comfortable with cheap borrowing, but wrong to treat gilt yields as a straightforward judgment on Britain’s fiscal credibility.
If the strange journey of British gilt yields has taught us one thing, it must be this: governments should take their debts seriously regardless of rates, rather than waiting for the bond markets to tell them when to start worrying.
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