UK financial stability

The central bank warned of a «material risk to UK financial stability» from turmoil in the British government bond market, sparked by chancellor Kwasi Kwarteng’s tax cuts and borrowing plan last week. Economists warned that the injection of billions of pounds of newly minted money into the markets could fuel inflation. UK government bond markets recovered sharply after the announcement, but the pound fell, down 0.8 per cent against the dollar in afternoon trading in London to $1.064. However, the bank stressed it was not trying to lower long-term government borrowing costs.

At a meeting with the chancellor yesterday, bankers urged Kwarteng not to wait until a planned statement on November 23 to take action to calm the markets. Kwarteng attempted to reassure markets that he was serious about restoring order to the public finances by telling government departments to identify efficiency savings, reminding them they would have to live within very tight spending limits already set until 2025. Following the BoE intervention, opposition Labour leader Sir Keir Starmer called for parliament to be recalled and for Kwarteng to abandon his plans. The central bank took the emergency measures after Kwarteng’s fiscal package last week sent the pound tumbling and set off historic falls in gilt prices.

The BoE said its action would bestrictly time-limited and came after market participants said there was a «proper shit show» happening in government bond markets. The Treasury blamed the turmoil on «significant volatility» in «global financial markets». However, it added that Kwarteng was «committed» to BoE independence. Gerard Lyons, advising Liz Truss, Britain’s new prime minister, on economic strategy, said he had urged Kwarteng to keep financial markets and affordability in mind before cutting taxes.

Lyons said ministers «mustn’t say anything further to exacerbate the situation» and should stress parts of the government’s growth plan that did not involve unfunded tax cuts.

www.sba.tax

Comments

Cloud Bookkeeping

HS2 cost cuts new routes and add delays.

Transport department officials have begun work on «Project Silverlight» suggesting the highspeed rail scheme might face four additional years of delay. The planned High Speed 2 rail line faces further delays of up to four years and more cuts to the project under plans being drawn up by ministers to rein in its ballooning costs. The extra delays to the country’s biggest infrastructure project would mean that it would not be completed until as late as 2045 — 12 years after originally planned. «This is a function of inflation; we are having to find huge savings because the cost of everything the department is already doing will have become so much more expensive by then,» said one government official. In October, the FT reported that the Treasury had asked HS2’s management team to identify potential cuts or «scope reductions» to the high-speed line. Transport department officials have subsequently begun work on Project Silverlight aimed at fi...

Doubt on CS's collateral.

Credit Suisse provided an emergency $140mn loan to Greensill Capital based partly on invoices to companies that deny ever doing the business stated on the documents. The Swiss bank provided the loan in October 2020, less than five months before the collapse of Greensill, a supply chain finance firm that counted former British prime minister David Cameron as a senior adviser. Invoices issued by metals magnate Sanjeev Gupta’s Liberty Commodities and sold to Greensill formed part of the collateral for the loan, according to documents seen by the Financial Times and people familiar with the transaction. Yet several of the parties named on the invoices have told the FT they did no business with Liberty. GFG has consistently denied any wrongdoing. Credit Suisse’s loan had a clause dictating that the collateral value had to be equal to or greater than the $140mn borrowed. The terms of the debt agreement only allowed invoices on Green-sill’s balance sheet to count towards this tally if t...

Tax cut

Sterling tumbled against the dollar to below $1 . 09 , hitting its lowest point since 1985 , after UK chancellor Kwasi Kwarteng unveiled a £45bn debt-financed tax-cutting package that sparked a historic increase in borrowing costs . Kwarteng’s political and economic gamble includes the biggest set of tax cuts for 50 years , with the end of the 45p additional rate for the highest earners as well as a sharp reduction in levies on dividends . But concern over the amount of debt required to finance the tax cuts triggered a frenetic day of trading that raised doubts on whether Britain’s new economic approach was sustainable . «Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time» . Kwarteng has staked the political fortunes of the Conservative party on the bet that the radical tax cuts and deregulation will raise Britain’s sluggish growth rate to 2 . 5 per cent . «This is a new appr...

Search This Blog