By William James and Sam Tabahriti
Wes Streeting resigns as Britain's Health Secretary
LONDON, May 15 (Reuters) - Britain's borrowing costs surged to 28-year highs on Friday after Andy Burnham, a mayor on the left of the ruling Labour Party, secured a possible path to challenge Prime Minister Keir Starmer, alarming investors and deepening a leadership crisis.
Starmer is struggling to hold on to power after a tumultuous week when a main rival in government quit, accusing him of a lack of vision, and others positioned themselves for potential challenges to his leadership.
After the drama of the last few days, any challenge could now take longer to materialise, as Starmer indicated he would fight to stay in power but would not block Greater Manchester Mayor Burnham from trying to win the seat in parliament he would need to launch his own leadership bid.
Wes Streeting, who quit as health minister on Thursday and is expected to run against Starmer if a formal contest begins, has indicated he was willing to wait and see whether Burnham can get to parliament.
That could take weeks, paralysing the government as it faces the economic fallout from the wars in Iran and Ukraine.
Britain's latest bout of political turmoil - it has had six prime ministers in the last 10 years since Brexit - drew the attention of U.S. President Donald Trump, who has criticised his former ally Starmer after Britain declined to join the Iran war.
Asked if Starmer would survive as prime minister, Trump said "It's a tough thing, unless he can straighten out immigration where he's weak, and if he doesn't start drilling", though asked if Starmer should quit, he added "I don't say that."
"I think he's a nice man, actually," Trump told reporters aboard Air Force One as he returned from a trip to China.
LAWMAKERS NEED TO 'TAKE A BREATH'
A British minister loyal to Starmer urged Labour Party colleagues to put the needs of the country before internal party politics.
"I think this weekend everyone needs to just take a breath," housing minister Steve Reed told the BBC. "We've had a dreadful week. We've looked appalling to the country in the way that we've behaved."
He said he would tell his colleagues: "Get on and do the jobs we were sent here to do."
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The potential return of Burnham to Westminster alarmed investors on Friday, as those on the so-called soft-left of the party, including Burnham and former deputy leader Angela Rayner, favour more state involvement in key industries, protecting workers' rights and more tax to spend.
Sterling, down around 2% against the dollar this week, was set for its worst week since late 2024, while UK long-term borrowing costs hit their highest in almost three decades and British bank stocks tumbled.
Yields on 30-year British gilts - a barometer of how investors view the government's long-term borrowing needs - leapt by almost 19 basis points to around 5.845%, hitting their highest levels since 1998.
Global bond markets were under pressure more broadly on Friday, as investors reassessed how quickly interest rates might have to rise to ward off a damaging spike in inflation.
But the moves in gilts were particularly sharp, with the 10-year yield reaching its highest level since the onset of the global financial crisis in July 2008.
Sterling fell to a five-week low at $1.33285, while British stock market indexes were down by about 1.7%. UK banks also fell sharply, with Barclays and Lloyds both down by around 3%.
ROUTE BACK TO PARLIAMENT CONVOLUTED
Despite the jittery reaction from markets, the route back to Westminster remains far from straightforward for Burnham, a former minister in Gordon Brown's Labour government who has previously tried, and failed, to lead the party.
He needs to win selection to stand as Labour's candidate for a vacant parliamentary seat, and then beat Nigel Farage's Reform UK party and the left-wing Greens in the election to fill it.
Labour won the seat in 2024, but since then the party has fallen behind Reform in opinion polls, and the populist party emerged as the biggest winner in the area in the local elections last week, a trend seen across the country which prompted the move against Starmer.
In trying to secure a return to parliament, Burnham would also likely trigger an election for his Greater Manchester mayoralty, which Reform would also challenge.
For now, Reed said the party needed to get behind Starmer.
"It remains the fact that there is no challenger, no one has gathered 81 nominations to mount a challenge against the prime minister," Reed added, referencing the formal party process for starting a leadership contest.
(Reporting by Sam Tabahriti, writing by William James; Additional reporting by Samuel Indyk and David Milliken in London and Trevor Hunnicutt aboard Air Force One; Editing by Kate Holton, William Schomberg and Alex Richardson)
