Markets barely flickered this morning as news broke that Australia has launched a crowd-funded inquiry into the Aukus submarine programme. The UK government, in a hastily arranged statement, insists the deal remains 'ironclad'. But let's be clear: this is not the sort of language that inspires confidence in the City.
The inquiry, funded by a mix of private donors and anti-nuclear activists, will examine the cost and feasibility of the nuclear-powered submarine project. For a programme already estimated at £100 billion, such scrutiny is hardly surprising. Yet the timing is curious. Australia's Labour government faces growing domestic pressure over defence spending, and the crowd-funding mechanism allows it to distance itself from any fallout.
The UK's response has been predictably bullish. A Downing Street spokesperson called the deal 'unshakeable', while the Ministry of Defence noted that the project remains on schedule. But one wonders whether this is spin or substance. The Treasury, for its part, has been quiet. That alone should give us pause.
Let's run the numbers. The Aukus programme is a long-term bet on geopolitical alignment and technological superiority. Any delay or cancellation would not only strand billions of pounds of investment but also signal a fragmentation of the Western alliance. The bond markets, which have been pricing in a degree of geopolitical risk, would likely react with volatility. Gilt yields could spike, and the pound might take a hit. However, for now, the market is treating this as noise. The FTSE 100 is flat, and the 10-year gilt is unchanged.
But the crowd-funding angle is a red flag. It suggests that the Australian government is outsourcing accountability. When the public pays for a inquiry, they expect results. And those results could include a recommendation to scale back or scrap the programme. The UK's insistence on 'ironclad' commitments may be more about managing expectations than locking in delivery.
From a fiscal perspective, the Aukus deal is a massive liability. The UK's defence budget is already strained, and any additional costs from a renegotiation would have to be funded by higher taxes or more borrowing. Neither option is palatable for a government that has promised fiscal discipline. The Chancellor will be watching closely.
In summary, today's news is a reminder that even the most 'ironclad' deals can corrode. The City's calm is a rational response to a story that is still unfolding. But investors should keep a close eye on Canberra. If the inquiry gains traction, the submarines may never set sail.
