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UPDATE 1-UK opposition leader sparks ire with default talk

Published 08/19/2009, 06:03 AM
Updated 08/19/2009, 06:06 AM

* Conservative leader Cameron talks of default risk

* Treasury calls comments "wrong and irresponsible"

(Adds Treasury response)

LONDON, Aug 19 (Reuters) - Opposition Conservative leader David Cameron said Britain's record level of borrowing during the recession meant the government was running the risk of defaulting on its debt, media reports said on Wednesday.

Cameron, tipped to become prime minister in a general election due by next June, said the country ran the risk of becoming less attractive to overseas investors, or unable to meet its obligations, if it continued borrowing.

He branded as a "disgrace" Labour's plans to more than double the national debt to 1.4 trillion pounds ($2,298 billion) in the next five years, newspapers reported.

"You can get to a level of government debt where, not that it becomes certain that people will cease to lend you the money, but you start running risks of them demanding higher premia, higher interest rates. Or you run the risk of not being able to meet your obligations," he was quoted as saying at the Royal Society of Arts in London.

The government's Treasury dismissed the comments.

"Any suggestion that Britain could default on its borrowing is wrong and irresponsible. UK borrowing costs are historically low, while the government has set out clear plans to halve the deficit in five years," a spokesman said.

Faced with lower income from financial services and rising welfare payments during the worst recession since World War Two, Britain's budget deficit is forecast to reach 175 billion pounds this year, more than 12 percent of GDP.

In May, Standard & Poor's cut Britain's sovereign rating outlook to negative from stable, retaining its triple-A rating but warning there was a one in three chance of a downgrade.

The head of Britain's debt management office said last month that he saw healthy appetite for UK government debt in international markets.

"SCAREMONGERING"

Cameron was careful to qualify his comments after Labour accused him in January of talking Britain down when he warned that Prime Minister Gordon Brown may be forced to go to the International Monetary Fund (IMF) to prop up its economy.

"I have never predicted that is going to happen. But as government borrowing goes up and up and up, you start running that risk," he was quoted as saying, in reference to a possible default, at the RSA event with author Nassim Taleb.

Sterling fell in early London trade, as traders used Cameron's comments as a reason to sell the currency.

An aide to finance minister Alistair Darling accused Cameron of scaremongering.

"It was an extraordinarily stupid thing to say which betrays his inexperience and opportunism," said an aide who asked not to be named.

"Rather than scaremongering, David Cameron should explain why he thinks it is right to undermine prospects of recovery by cutting spending now."

Public spending is likely to be a key political battleground in the run-up to the general election.

Cameron's Conservative party is well ahead in the opinion polls, with one of the latest showing Labour trailing by up to 17 points. Economists say whichever party wins the election will have to juggle a combination of spending cuts and tax hikes to cut the budget deficit. (Reporting by Avril Ormsby and Keith Weir; editing by Jon Boyle)

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