Is the UK heading for a Sovereign Debt crisis?

Morgan Stanley think it's a possibility:

"The US investment bank said there is a danger Britain’s toxic mix of problems will come to a head as soon as next year, triggered by fears that Westminster may prove unable to restore fiscal credibility.

“Growing fears over a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK's AAA status,” said the report, written by the bank’s European investment team of Ronan Carr, Teun Draaisma, and Graham Secker.

“In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” they said.

Morgan Stanley said that such a chain of events could drive up yields on 10-year UK gilts by 150 basis points. This would raise borrowing costs to well over 5pc - the sort of level now confronting Greece, and far higher than costs for Italy, Mexico, or Brazil. "

Be under no illusions, the UK economy is in deep, deep trouble and unless firm action is taken immediately after the next general election the UK will lose its AAA status. An incoming Conservative government (for a returned Labour government would neither be firm nor honest) will have to honestly declare the mess that Tony Blair and Gordon Brown have left them and how they plan to clear it up. The clear-up will be painful, maybe more painful than that required to clear up after Wilson and Callaghan in the early 1980s, but it has to be done. My worry is that David Cameron is not half the man that Margaret Thatcher was and that he craves approval more than he wants to do the right thing by the country.