From Euromoney, September 26:
Kwasi Kwarteng’s debt-funded tax giveaway has re-priced UK risk at a stroke, but the high cost may bring scarce benefit.
It is unfair to say that UK chancellor Kwasi Kwarteng’s dash for growth through unfunded tax cuts has sacrificed his credibility with the foreign investors on whose kindness the country depends to finance its deficits.
He had very little to begin with.
The fall in sterling on Friday afternoon and Monday morning – that has further impoverished the population and grabbed all the headlines – is merely a continuation of the trend since June 2016.
Over the six years since the Brexit vote, the currency has lost 25% of its value against the dollar.
So, what’s another 4% decline between friends? And the pound is only down 3.5% against the euro since Friday.However, the swift repricing of UK risk – partly in recompense for the possibility of further currency falls, partly in recognition of policy incoherence – was remarkable and potentially much more damaging.
Yields on developed country bonds are not meant to rise 50 basis points in a single day. Unless that rise in borrowing costs is reversed rapidly – it almost certainly won’t be and could get worse – then it will effectively annul any boost from the growth plan.
UBS calculates that, with the Bank of England no longer the marginal buyer of gilts and now into quantitative tightening, the volume of new UK government bonds the private market will have to buy over the next 18 months is equivalent to the volume they bought in the previous 54 months....
....MUCH MORE
Harsh.
