GEORGE KEREVAN: Banana Republic

I notice in the small print of Gordon Brown’s deal with the banks - to allow hard-pressed middle class families to defer paying interest in their mortgages - that it will cost the Government another £1 billion it doesn’t have.

The scheme is fair enough – a runaway cycle of repossessions and forced house sales will only send property values crashing even further, adding to the threat of permanent deflation. However, there are dangerous consequences to the way the Government is making new spending promises by the day.

When the Government borrows money it sells bonds. Institutions and funds buying such bonds need to take out insurance against default. This insurance is called a credit default swap, or CDS.

In the long forgotten days when Gordon Brown was still preaching the virtues of prudence (i.e. last February) it cost a mere £8,000 to insure a £10 million UK Government bond against default over five years. This was because no one ever considered for a moment that the British Government would fail to meet a debt obligation.

But to insure that £10 million bond today will cost you £110,000. This is not only an all-time high, it rates Britain’s creditworthiness. The cost of taking out insurance cover on British Government debt is rising faster than for any other major economy.

In fact, it now costs more to insure against Gordon Brown and Alistair Darling defaulting than it does to insure against Lloyds TSB not meeting its liabilities. Did anyone mention banana republic?