The state of the U.K. economy fills British financial historian Niall Ferguson with foreboding. âThe probability of a real sterling crisis is around one in three, and the probability of major tax hikes and cuts in public spending is roughly one in one,â the Harvard University professor says. Fergusonâs concern stems from the deterioration in the U.K.âs public finances, which prompted Standard & Poorâs to warn on May 21 that the country could lose its AAA debt rating. The firm estimated the cost of propping up Britainâs banks at 100 billion pounds ($160 billion) to 145 billion pounds and said government debts could double to nearly 100 percent of gross domestic product by 2013. Chancellor of the Exchequer Alistair Darling said on April 22 that this yearâs government deficit would hit 12.4 percent of GDP. Alan Clarke, a London-based economist at BNP Paribas SA, expects it to reach 17 percent of GDP in 2010. âWeâre not Iceland or Ireland, but weâre closer to them than we are to the U.S.,â says Ferguson, author of The Ascent of Money: A Financial History of the World (Penguin, 2008). Iceland had to borrow from the International Monetary Fund to avoid default after its banks collapsed in October; Ireland this year may have the steepest economic contraction of any industrialized nation since the Great Depression. Britons can expect to face spending cuts in coming years in all areas, including social security and health care, says Nigel Lawson, who was chancellor of the Exchequer under Margaret Thatcher from 1983 to 1989. Political chaos is complicating the financial crisis. In May, the Daily Telegraph reported that lawmakers had been reimbursed for expenses such as moat cleaning and massage chairs, leading at least 15 to say they wonât stand for reelection. With his popularity plunging, Labour Prime Minister Gordon Brown then suffered the indignity of six cabinet ministers quitting in early June, including two caught up in the expenses scandal. Brown now trails Conservative leader David Cameron by from 8 to 22 points, according to 15 polls in May and June. By law, Brown must call an election no later than June 2010. âOur public finances are easily the worst weâve ever had in peacetime,â Lawson, 77, says. âThe amount of borrowing the government will have to do as a result of the deficit is very worrying.â He says yields on U.K. debt will have to climb to attract buyers. http://bloomberg.com/news/marketsmag/mm_0809_story4.html Of course yields have to rise. Where is the risk premium for all that debt the U.K. government is taking on ???