Govt faces tough job to sell record debt issuance

By David Milliken

LONDON (Reuters) - No matter how the Debt Management Office dishes up the record 220 billion pounds of government debt it has to sell this fiscal year, investors are going to struggle to digest it all without a few hiccups.

A bleak growth outlook for this year and next means that Chancellor Alistair Darling revealed on Wednesday Britain will run its biggest ever budget deficit of 175 billion pounds or 12.4 percent of GDP -- requiring record gilt issuance.

After Darling presented his 2009/10 Budget, the DMO tried to make the gilts as appetising as possible, but fixed income strategists warned there was a real risk of indigestion.

"We've got an awful lot of supply in the pipeline and not much in the way of a credible roadmap to bring UK public finances onto a sustainable basis," said Richard McGuire, fixed income strategist at Royal Bank of Canada.

Gilt prices tumbled after the Budget and DMO issuance plans, which were well above what analysts had expected.

Darling forecast that public sector net borrowing would only decline fractionally to 173 billion pounds in 2010/11 and would still be at 140 billion pounds in 2011/12 -- and McGuire said the assumption of a return to growth of 1.0-1.5 percent next year looked too optimistic.

"The fiscal tightening is a drop in the ocean. It's sound and fury signifying nothing, as it were," he said.

Against this backdrop, DMO chief executive Robert Stheeman told Reuters he was confident the debt agency would have no big problems selling the requisite gilts, even if there was a risk of another failed auction like last month's for a 40-year gilt.