Thames Water collapse could trigger Truss-style borrowing crisis, Whitehall officials fear

Senior Whitehall officials fear Thames Water’s financial collapse could trigger a rise in government borrowing costs not seen since the chaos of the Liz Truss mini-budget, the Guardian can reveal.

Anna Isaac www.theguardian.com (Extract)

Such is their concern about the impact on wider borrowing costs for the UK, even beyond utilities and infrastructure, that they believe Thames should be renationalised before the general election.

Officials in the Treasury and the UK’s Debt Management Office fear that, unless the UK’s biggest water company is renationalised as soon as possible, “prolonged uncertainty” about its fate could “damage confidence in UK plc at a sensitive time”, with elections in the UK and the US later this year.

Earlier this month, the Guardian revealed details of government contingency plans, known as Project Timber, to renationalise Thames via a special administration. This could lead to the bulk of its £15bn of debt being moved on to the government’s balance sheet. Thames’ investors have refused to pump more money into the struggling company amid a standoff with the water regulator Ofwat.

Some lenders to its core operating company could lose up to 40% of their money under the plans, a move that officials believe marks a careful balance between managing public outrage at the water company’s many failures and the need to sustain investor confidence in the UK.

Those contingency plans also describe a risk of “contagion” from Thames’s plight that could trigger a loss of confidence that feeds through to wider state borrowing costs.

In the aftermath of the Truss mini-budget in September 2022, UK borrowing costs shot up as government debt markets went into freefall. Her chancellor Kwasi Kwarteng’s promise of £45bn of unfunded tax cuts, the sacking of the most senior civil servant at the Treasury and Truss’s refusal to have her sums checked by the independent Office for Budget Responsibility spooked investors and sent the value of UK debt instruments, known as gilts, plummeting.

The pound hit a low against the dollar not seen since 1985, and the whiplash effect on the bond market damaged some pension funds’ investment strategies so severely that the Bank of England had to stage an emergency market intervention to maintain market stability. That crisis added billions of pounds to the UK’s cost of borrowing, as investors demanded a higher price to lend to it. British households experienced big spikes in mortgage costs, as banks and building societies passed on higher borrowing costs. Many mortgage offers were pulled overnight…..