"It is the beginning of a new era”. These were the words with which the Chancellor of the Exchequer, Kwasi Kwarteng, presented the 45 billion tax reform strongly desired by Premier Liz Truss which foresees tax cuts for the wealthiest citizens and for companies to be financed entirely through debt. Until now, however, more than "a new era" was the beginning of a historic collapse of the pound, a surge in UK government bond yields and a crisis of confidence of the markets towards the British economy which had not even been seen on the occasion of the Brexit referendum. A perfect storm which, as the Financial Times, has even overshadowed the victory of the right in the Italian elections which until Friday seemed to be the main fear of international investors.
The opinion of the markets on the British tax reform
Irresponsible and risky. This is the relentless judgment of the markets on the massive plan of tax cuts for the wealthiest sections of the population announced on Friday by the British Government. The question everyone is asking is essentially one: how can one think of launching such an expensive structural plan by financing it entirely in debt and, moreover, in such a difficult period for the world economy? Liz Truss's is in fact a bet: according to the Prime Minister, only by reducing taxes on the richest will the economy be able to grow again. A Thatcherite-style gamble that will bring the deficit at historic high of 9%, at a time when the UK is already virtually in a recession and with no guarantee that the 'cure' will work.
The criticisms of the IMF and the negative opinion of Moody's
To worsen an already more than delicate situation in itself they have also arrived the criticisms of the International Monetary Fund which, in an unusually explicit statement, has literally demolished the plan of the Truss Government stating that it risks further increasing inflation and increasing inequalities. The IMF, the document reads, "does not recommend large fiscal stimulus packages at this juncture, because it is important that fiscal policies do not act in conflict with monetary policy". Central banks around the world, including the Bank of England, have been going in the opposite direction for months, raising interest rates in order to bring prices down. The Fund therefore believes that the presentation of the annual budget (scheduled for November, ed.) will represent an opportunity for the British government to find other ways to ensure more targeted support for the economy and for reconsider the measures taxes announced, especially those in favor of taxpayers with high incomes”.
Hard also the judgment of Moody's. According to the rating agency, the British government's tax cut plan could lead to wider budget deficits and higher interest rates, threatening the country's credibility with investors. The cuts, Moody's points out are “bad for credit”. Not only that: “One prolonged confidence shock, stemming from market concerns about the credibility of the Government's fiscal strategy, resulting in structurally higher borrowing costs, could weaken the UK's debt affordability more lastingly,” he said.
The historical collapse of the pound
The rejection of the markets it was as immediate as it was peremptory. Immediately following the presentation of the new fiscal package by the Chancellor of the Exchequer, the equivalent of our finance minister, the pound fell to 1,102, touching the lowest since 1985. The decline also continued in the following days: on Monday the British currency fell to an all-time low of 1,035 dollars, recording the largest drop since the exchange rate has been measurable. Today, a pound is worth $1,0691. Pound is also down against the euro (-3% in a week) and today stands at 0,8951 for one euro.
Not even the new announcement by Kwarteng, which anticipated plans for a new medium-term fiscal strategy, served to cool the tension. On November 23 will be published the “Medium-term budget planwhich will provide further detail on the government's fiscal rules, including ensuring that debt falls as a share of GDP over the medium term. But the blanket seems to be very short: according to economists, the only way out would be to launch a drastic cut in public spending which, however, would fall on the lowest sections of the population, almost ignored by the tax reform (for them taxes will drop by only 1%) and grappling with the consequences of galloping inflation.
Government bond yields British
There is no peace even on the secondary market. Yields on XNUMX-year government bonds the British exceeded 4% (reaching 4,25%), the highest level for 12 years now, and according to forecasts they will even reach 6%. Meanwhile, it Bund spreads Germans went from 130 to 210 points.
“Nothing in the UK government bond markets over the past 35 years – not even the UK's exit from the European Monetary System, 11/2008, the XNUMX financial crisis, Brexit, Covid or any Bank of England move – is comparable to the price movements in reaction to the plan promoted by the Government”, underlined the Financial Times.
The emergency intervention of the British Central Bank
As a result of what is happening, the Bank of England has announced an intervention in the UK bond market. The Boe will make purchases of government bonds to "restore normal market conditions". Not only that, the 31-year Gilt auction scheduled for this morning has been postponed to October XNUMXst.
“The Bank will carry out purchases of long-term government bonds”, the BoE announced in a note, in which it specified that this “operation will be entirely financed by the Treasury”.
In response, the 30-year rate, which had risen to 5,14% at the start of the session (the highest level since 1998), fell to 4,73%.
