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Analysis-British bond market crash shines on Big Bang plans for London

By Huw Jones

LONDON (Reuters) – Britain’s new prime minister, Liz Truss, vowed to “unleash” the City of London to boost growth, but the bond market crash due to tax cuts will bring the shine to its “Big Bang” plan for financial services.

Markets were shocked last month when Britain’s Chancellor of the Exchequer Kwasi Kwarteng unveiled plans to increase borrowing to fund lower taxes, sending government bond yields skyrocketing and the pound plummeting against the dollar.

In a rare move, the Bank of England was forced to buy unlimited government bonds to restore calm and avert what some are calling a near “Lehman moment” in UK government bonds, leaving the City of London’s financial district a veil. became.

“Markets are all about confidence, and if you lose that confidence, which we are at serious risk of, then we need to show that fiscal sustainability is part of the plan,” said Alasdair Haynes, CEO of Aquis Stock Exchange.

Amid a cost of living crisis and opposition from some of the government’s own lawmakers, Kwarteng on Monday dropped an element of the tax cut plan worth around £2 billion ($2.3 billion).

Analysts said it made little difference to the overall size of the loans, and that a more sustainable solution was needed before the Bank of England stops supporting government bonds in mid-October. Kwarteng now plans to bring forward the release of its budget plan to later this month, the UKTN and a government source said late Monday.

City officials have applauded Truss’s new-found warmth to the sector after years of being left out in the cold following Brexit. They also praised her appetite for bold measures against the economy, but within limits to avoid impact on the financial sector.

“That’s fine if you do it within parameters people are comfortable with and expect, but don’t lose berths to the settings that allow you to be fairly radical without impact,” said Miles Celic, chief executive of TheCityUK, which promotes the UK financial sector abroad.

“The UK has been a bit of a minefield in recent weeks,” Ken Griffin, billionaire founder of Citadel Securities, one of the world’s largest market-making firms, told an investment conference last week.

“It’s the first time in a very long time that a major developed market has lost investor confidence.”

SOFT STRENGTHS

Britain’s £261 billion financial sector is one of the largest industries, with a trade surplus of around £90 billion meaning there is a lot at stake.

Its reputation for robust, predictable and credible institutional frameworks has been a bedrock of the city’s international reach, but they have been missing over the past week or so, said William Wright, CEO of think tank New Financial.

“You have to be pretty bold to make an investment decision in the UK now,” Wright said.

Unpredictability in UK policymaking threatens to dent the impact of Kwarteng’s moves planned this month to make financial rules friendlier, Wright added.

The sector was already on the back burner before the bond market crash, which forced banks, insurers and asset managers to spend millions of pounds on opening hubs in the European Union to avoid business disruption after Brexit.

Initial regulatory reforms, such as easing listing rules, have failed to bear much fruit after Amsterdam overtook London to become Europe’s main trading center for equities.

“The real problem for me is that if asset prices fall and sterling remains incredibly low, UK plc is for sale because the Americans can come in and basically buy whatever they want. Why put your business here in the UK , knowing she’s vulnerable?” asked Haynes.

Bill Campbell, global bond portfolio manager at DoubleLine, said the Bank of England’s credibility was also at stake.

“We have further reduced our exposure to the UK as we try to get a better idea of ​​the trajectory of the policy and whether it makes sense,” Campbell said.

REALITY REGULATION

Even before the bond market crash, some in the financial sector were concerned about how Truss and Kwarteng were planning 1980s-style deregulation, starting with removing a cap on bank bonuses inherited from the EU. .

A comprehensive bill is already in parliament to update existing financial rules, relax insurance capital requirements and regulate new sectors such as stablecoins.

The City of London Corporation, which manages the “Square Mile” financial district, said a government focus on the competitiveness of financial services would support Britain’s economic rebound.

But Truss’ promise to scrap all remaining EU rules by the end of 2023 has raised some concerns, as the existing rulebook is largely based on tried-and-true international standards that Britain was key in shaping, and that radically change entails costs for banks.

“Any approach to regulatory change will have to recognize that reality,” said Celic of TheCityUK.

A review of financial watchdogs and the Bank of England’s promised mandate from Truss also raised concerns about political interference with regulators, whose independence has long been seen as one of the city’s international strengths.

Kwarteng has rolled back to some extent, telling financiers last week that he would not tinker with the current structure of regulators — silencing talk of a watchdog merger for the time being — and said Monday he had never “bullied” the central bank. .

($1 = 0.8968 pounds)

(Additional coverage by Caroline Madl and Davide Barbuscia in New York; editing by Mark Potter)

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