LONDON the new British Premier Liz Truss promised to “unshackle” the City of London to fuel growth, but the bond market due to tax cuts could ruin the luster of her “Big Bang” strategy for financial services.
Markets were scared this month after UK finance minister Kwasi Kwarteng revealed plans to raise borrowing to pay for lower taxes, sending the government bond yields skyrocketing and the pound crashing to record lows in relation to the US dollar.
In a unique move that was unprecedented, a rare move, the Bank of England was forced to purchase unlimited bonds to restore peace and avoid what many have described as the “Lehman incident” within UK Treasury bonds. which cast an uneasy shadow across London’s City of London financial district.
“Markets are about confidence If you lose that confidence which we’re in high danger of, we need to prove the financial viability is an integral part of the strategy,” said Alasdair Haynes the chief executive officer for the Aquis Stock Exchange.
In the midst of a rising cost of living crisis as well as opposition from certain of the government’s legislators, Kwarteng ditched one element of the tax cut plan on Monday. It amounts to two million pounds ($2.3 billion).
Analysts say it has made no change to the totality of borrowing, and an alternative that was more sustainable was required prior to when the Bank of England stops propping up gilts by mid-October. Kwarteng will now delay the release of his fiscal policy to the end of October according to The Financial Times and a government source told reporters late on Monday.
City officials have praised Truss the newfound warmth she has shown towards the financial sector following many years of being left in the cold by the Brexit vote. They have also praised her enthusiasm for bold actions regarding the economy however within the limits necessary to prevent a negative impact on the sector of finance.
“That’s okay as long as you’re operating within the parameters people feel comfortable with and accept, but you shouldn’t let go of your moorings to the institutions that permit you to be fairly radical and not have any consequences,” said Miles Celic who is chief executive of TheCityUK which promotes Britain’s financial sector in the world.
“The UK has been a kind of minefield for in the past few days,” Ken Griffin, the billionaire founder of Citadel Securities, one of the biggest market-making firms in the world at an investor conference last week.
“It is the first time we’ve ever seen an established market of this magnitude, for a long time and lose the trust of investors.”
SOFT STRENGTHS
The 261 billion pounds of financial sector is among the biggest sectors, and has a the country’s largest trade surplus, which is around 90 billion pounds. That’s there is a lot at risk.
Its reputation for solid stable, reliable and reliable institutions has been a foundation of the City’s global reach, but these aren’t as strong in the past few days according to William Wright, CEO of New Financial, a think tank. New Financial.
“One must be quite confident in order to invest in the UK at this moment,” Wright said.
Uncertainty in UK policymaking could stifle Kwarteng’s plans scheduled for this month, which are expected to make the rules for financial transactions more lenient, Wright added.
The industry was already in a bind prior to the crash of the bond market in the early 2000s, with insurers, banks and asset managers having to invest millions of pounds to establish hubs across the European Union to avoid disruption to their business following Brexit.
Initial reforms to the regulatory system, like relaxing listing regulations have not yet yielded any significant fruit since Amsterdam took over London as Europe’s leading market for trading shares.
“The main issue I have is that if the value of assets fall and sterling remains extremely low the UK plc is for sale because Americans are in the market to buy anything they desire. Why would you want to put your company in the UK being aware that it could be at risk?” Haynes asked.
Bill Campbell, global bond portfolio manager at DoubleLine The credibility of the Bank of Britain was also on the line.
“We have also reduced our UK exposure in order to gain a better understanding of the policy’s direction and if it is sensible,” Campbell said.
REGULATING REALITY
Before the market crash of the bond market there were concerns in the financial sector about the way Truss as well as Kwarteng were in the process of preparing the 1980s-style “Big Bang” of deregulation that would begin by removing the cap on banker bonuses taken over by the EU.
There’s already a huge legislation in parliament to revise the financial regulations in place, reduce capital requirements for insurance and begin the process of regulating new industries such as stablecoins.
The City of London Corporation, who manages the “Square Mile” financial district, has said that a focus by the government on competitiveness in the financial sector could help in the economic revival of Britain.
However, Truss promises to eliminate the remaining EU rules at 2023’s expiration date has raised some doubts, as the rules currently in place are founded on internationally-tested norms that Britain played a key role in developing, and that any radical changes can be costly for banks.
“Any plan for regulatory reform will have to be aware of this reality,” TheCityUK’s Celic said.
The review of financial watchdogs , as well as the Bank of England’s mission, as promised by Truss has also raised questions regarding the influence of politicians in the regulators’ independence, which has been viewed as being one of London’s many international strengths.
Kwarteng has reversed his position to an extent, telling financial institutions this week that he wouldn’t change the regulatory structure – thereby squelching the idea of a merger of regulators for the moment – and telling reporters on Monday that he had niether “rubbished” his central bank.
($1 = 0.8968 pounds)
