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UK on verge of 2008-style meltdown after
mini-budget
Sean Seddon
Wednesday
28 Sep 2022 11:18 am
The Bank of
England has been forced to intervene to prevent a ‘material risk to UK
financial stability’ as the market meltdown triggered by the government last
week worsens.
It will buy
up massive amounts of debt to shore up prices following a stock market collapse
in recent days, a move on a scale usually reserved for massive global financial
crises.
The value
of the currency plummeted after the new government announced its economic
proposals on Friday.
It caused
the cost of borrowing that the government must pay to hit record highs and has
fuelled massive instability in the bonds market.
Given that
crucial financial institutions like pension funds rely on the stability of
government bonds to operate, the Bank has now been forced to step in.
Liz Truss
and Kwasi Kwarteng signed off on un-costed plans to borrow billions of pounds
to fund a raft of tax cuts last week, including for society’s richest.
They argue
it will help boost growth but given soaring inflation levels and the gloomy
global economic picture, investors fear the government has written a cheque it
won’t be able to cash.
The value
of Sterling against the Dollar hit an historic low on Monday and falling
confidence in the UK economy has sent major investors running for the exit.
In a highly
unusual move, the International Monetary Fund directly criticised the
government’s plan last night and urged it to ‘re-evaluate’.
Now the
bank’s governor has announced an unprecedented emergency move to stop the
situation deteriorating further by buying up government debt in a bid to
stabilise the soaring interest rates the government must pay.
In a
carefully worded statement, the Bank effectively admitted it fears the UK could
be on the cusp of a full blown economic meltdown without action and warned it
could lead to massive cuts to vital public services.
It also
suspended plans to launch an auction of government bonds after a collapse in
prices.
The
Treasury has committed to underwriting the final bill for the debt-buying
splurge but it’s unclear how much it will end up costing the taxpayer.
A statement
from the Bank read: ‘Were dysfunction in this market to continue or worsen, there
would be a material risk to UK financial stability.
‘This would
lead to an unwarranted tightening of financing conditions and a reduction of
the flow of credit to the real economy.
‘In line
with its financial stability objective, the Bank of England stands ready to
restore market functioning and reduce any risks from contagion to credit
conditions for UK households and businesses.’
A Treasury
spokesperson acknowledged ‘significant [market] volatility in recent days with
referencing the impact of its own mini-budget and said the Bank was taking
action ‘to restore orderly market conditions’.
The
Treasury also moved to ensure markets that Mr Kwarteng is ‘committed to the
Bank of England’s independence’ after it emerged he is meeting with its
governor every day, an unusual arrangement for a chancellor and head of the
central bank.
Representatives
from Bank of America, JP Morgan, Standard Chartered, Citi, UBS, Morgan Stanley
and Bloomberg were called to attend a meeting with Mr Kwarteng on Wednesday.
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