Yves here. With too much Trump-generated furor, we’ve managed to skip over a potentially important development, that of a possible slow-motion currency crisis/bond market temper tantrum in the UK. To give a sense of sentiment, this is the landing page of Bloomberg’s UK site. Bloomberg generally does not run headlines that take up the the full width of the page:
And from a widely-read Bloomberg story yesterday, Britain’s Bond Crisis Invokes Memory of 1976 Crisis:1
That’s the analysis of former Bank of England rate-setter Martin Weale, who said the Labour government may have to resort to austerity to reassure markets that it will address the UK’s escalating debt burden if sentiment does not change….
Over the past few days, long term UK borrowing costs have soared and the pound has fallen – a rare combination that can signal investors have lost faith in the government’s ability to keep a lid on the national debt and control inflation.
Typically, higher yields would support a currency, but Thursday morning sterling sunk below $1.23 to its lowest level since November 2023, having started the year above $1.25. Still, the currency’s latest struggles are less severe than in September 2022, when it crashed from close to $1.17 to below $1.07 in a couple of weeks.
And Britain’s market troubles are not an isolated case, coming amid a global selloff in bonds.
Nevertheless, Weale said the events echo the 1976 debt crisis “nightmare” that forced the government to ask the International Monetary Fund for a bailout…
Other economists and investors blamed the market moves on skepticism around Labour’s promise to fund a large increase in spending with fastest growth….
Almost half a century ago, Britain applied to the IMF for a $3.9 billion loan after large budget and trade deficits plunged the country into crisis. In return, the government agreed to IMF-imposed austerity. Britain is today running twin deficits again, and has been for many years.
Countering that view is Wolf Richter in “Bond Market Rout” in the UK (like in the US) Only Pushes the 10-Year Yield into Low End of Old Normal after Many Years of Interest Rate Repression. While that is true (as is the fact that mortgage rates in the US are in what was old normal before the crisis), nearly a full generation has passed under a low interest rate regime. Policy-makers acted as if it would continue and are having great difficulty recalibrating.
If you click through, while the tweet below provides another high level recap of the UK’s conundrum, El-Erian advocates hard core neoliberalism, as in austerity and crushing labor bargaining power. Um, decades of a lower dose of this sort of thing is what got the UK in this mess in the first place:
The UK continues to experience the unhelpful combination of higher yields and a weaker currency (see Bloomberg chart below on the British Pounds depreciation versus the Dollar over the last three months).
This combination, which historically has been more common in developing… pic.twitter.com/BUeazw7gzZ— Mohamed A. El-Erian (@elerianm) January 9, 2025
Additional detail:
The surge in UK debt costs threatens to wipe out Chancellor Rachel Reeves’ slim budget buffer and create instability ahead of an official fiscal update on March 26, as @lizzzburden reports https://t.co/Yt7WqggkQo pic.twitter.com/XIDd8ZlwXW
— Bloomberg TV (@BloombergTV) January 9, 2025
Admittedly, as with stagflation in the US in the 1970s, there’s no quick and easy remedy to higher energy prices, but that is intensifying an underlying not-wonderful set of fundamentals. High-ish inflation and borderline recession mean the usual MMT prescription of more net spending will simply generate more price increases, unless there are target areas where more spending would increase capacity enough so as to offset or even reverse inflationary effects. Recall that none other that the staunch neoliberal Larry Summers argued during the post crisis period of weak growth in the US, that spending on infrastructure would generate $3 for every $1 of outlay (obviously up to some limit). But the UK seems incapable of thinking in industrial policy terms to get itself out of its mess. While in theory the Labour claims that it will spend more to get higher growth signals a vague recognition that well-focused spending can indeed increase output, the Blairite Starmer Labour Party lacks the imagination and cred to devise and promote the needed ambitious programs.
By City A.M. Cross posted from OilPrice
- The pound sterling has fallen to its lowest level in more than a year, and UK government bond yields have reached their highest point since 2008.
- Investors are concerned about the UK’s fiscal outlook and the Bank of England’s ability to control inflation.
- The UK government’s bond issuance is expected to reach almost £300bn this year, which could put further pressure on the economy.
Pound sterling has continued to sell off this morning, and UK government bond yields have ticked higher as UK risk assets remain under pressure.
The pound fell below $1.23 against the dollar in early trade and is currently down 0.7 per cent against the dollar and 0.6 per cent against the euro.
Meanwhile, the domestically focused FTSE 250 index opened lower 0.6 per cent.
The day after 30-year government bond yields reached their highest this century, yesterday 10-year government yields jumped to 4.82 per cent, the highest since August 2008.
“We’re not at the Truss/Kwarteng stage just yet, but things are clearly on very shaky ground indeed,” said Michael Brown, senior research strategist at Pepperstone.
The pound also fell against all major currencies yesterday, plummeting more than one per cent versus the dollar to its lowest in more than a year at $1.238.
Derivatives point to the weakness in the pound continuing, with one-week sterling to dollar risk reversals falling to the most negative since early November, which implies puts trading at the biggest premium over calls since US election day.
“In part, this move is shadowing a rise in US bond yields, driven by signs of a still strong US economy alongside indications of persistent inflation that are prompting investors to review expectations for two rate cuts in the year ahead,” explained Lindsay James, investment strategist at Quilter Investors.
“Term premium, the additional yield investors demand for lending long-term money, has also been on the rise, with one factor being the pure level of uncertainty around the future path of inflation and the productive potential of the economy.”
With the UK enduring stickier inflation than most other developed economies, the Bank of England has been towing a more hawkish line than most of its peers.
However, a key factor continues to be the size of the bond sales by both the UK government and the Bank of England.
The government’s bond issuance is expected to reach almost £300bn this year, driving up yields even as the economy begins to show cracks.
Stagnant growth and the continuing gilt sell-off has “all but wiped out Chancellor Reeves’ fiscal headroom, which was already incredibly slim at around £10bn,” noted Brown.
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1 Did AI write this headline? A crisis cannot invoke. People or their institutions can. It should read “evokes”.
The UK is in a buggers muddle but Elon and the City boys and BOE are determined to force Labour out for Refrom party who will foist private health care on us all.
This sounds to me like class warfare, even against a party as craven as the Labour Party:
From the quoted Bloomberg article: “That’s the analysis of former Bank of England rate-setter Martin Weale, who said the Labour government may have to resort to austerity to reassure markets that it will address the UK’s escalating debt burden if sentiment does not change….”
Am I to believe that the underlying problems of the U.K. economy (deindustrialization, feudal land holdings, concentration of wealth, financialization of London) somehow didn’t exist under Boris Johnson and the Tories?
It sounds as if the lords and ladies of the manor simply want to loot and pillage, which is their specialty.
Meanwhile, the U.K. government maintains the glorious imperiali Project Ukraine, to avoid facing the devolution of England into a flavor-starved Poland.
Growth prospects for the UK are grim, partly but not wholly because of the self-harming act of leaving the EU Single Market. Before 2016 the UK was well on the way to becoming the financial and commercial capital of the EU. Now what? Nobody appears to have any real idea how to offset the damage in order to generate any rise in living standards, sorely needed in the poorer regions outside the South-East, which have been the worst hit by Brexit.
Whether or not it was a conscious decision by the Tory Government is unclear IMO, but the one factor which has boosted the economy in recent years has been a large increase in immigration into the UK. However, as many of these immigrants have brought dependents with them, the net effect seems to have been to lower per capita income in the UK. That many of them are coming from the Third World is going to create political problems for the Government if they do not significantly cut the inflow. I read comments on social media to the effect ‘import the Third World and you become the Third World’. The current angry debate on ‘grooming gangs’ shows the potential for street violence like the anti-Muslim riots seen last summer, A real witches’ brew.
The most likely policy response in the UK IMO to current financial market pressures is likely to be via interest rates. Either the Bank of England will indicate no further cuts in interest rates in the near future or, if forced, an increase in interest rates will be announced. This will of course weaken the economy in 2025/6.
The UK economy nowadays really is a basket case. Its skill levels are poor by comparison with its neighbours, its infrastructure is in bad condition and it is outside the Single Market. Foreign investment has fallen, but why would foreign investors prioritise the UK nowadays?
I did not make that point and should have. Thanks for correcting that oversight.
When it comes to the UK, a lingering question I have is “What was the cost of the military adventures in the Middle East in the early to mid 2000s for the UK?”
Beyond the money spent, it does seem like other economic projects were stalled during that time as the focus anf priority was elsewhere.
I’m inclined to agree. While I don’t have any insights into the happenings of London’s financial circle, but I’d suspect some of this is post Brexit induced. From what I’ve read here and there since Brexit, the London/UK financial community has lost a lot of stature and market power. It only seems logical that foreigners with financial investments in the UK would be predisposed to moving their funds out of the UK over time. If there is enough volume one would expect bond prices to fall (rates to rise) as they are sold and the pound to fall as those leaving investments move to new currencies. This easily can become a spiraling situation as a falling currency eats into pound denominated asset returns which can trigger more foreign sales and more sales of the pound as money moves out of the UK dropping the value of the pound further; and imports become more expense so import inflation could even accelerate.
Sadly, in situations like this I believe history says most countries fail to actually implement policies that effectively work against this dynamic. The current fears about the UK government debt and deficit are not likely going to fix anything. At best austerity will crush spending and reduce imports which MAY cut some of the pound outflows, but that’s likely a lot of pain with no promise of success.
Goosing immigration numbers is a trick that the finance parasites that rule us love. Same story in the other Commonwealth anglo countries. I can tell you that in Canada this has definitely lead to us getting poorer on a per capita basis despite overall GDP going up:
This was as of April 2024. What this tells us is there are limits to the immigration trick (duh!), but as long as aggregate GeeDeePee keeps going up and housing prices stay goosed, will the finance parasites care? What other easy neoshitlib levers are left to pull to keep this train on the rails, other than importing a few million more people ‘until morale improves’?
I suspect you are right about the hidden agenda behind immigration. Its been quite noticeable over the past decade or so that the UK has had GNP growth that looks quite healthy in comparison to most developed countries, until you break it down pp. It then starts to look very anaemic.
Of course, having immigration and a ‘relatively’ healthy demography can result in longer term growth, but a lot depends on the socio-economic status of the incomers. And that doesn’t look so great.
While the problems, especially in capital investment, have been apparent since the Tories came in (to give credit to Blair, there was a very significant improvement in some types of investment during the 1990’s), I think you are right that the UK is in slow puncture mode after Brexit. I’ve commented here before that the one bright sector of the UK economy seemed to be the high risk start up sector (mostly due to the financial attractiveness of London for venture capital), but I believe from some sources I’ve read that this is also faltering.
The ‘strategy’ of Labour, if there is as such, seems to me to be trying to find some sort of fine balance between being fiscally austere enough to keep the bond markets happy while pumping in enough cash into public services to staunch at least some of the Tory inflicted wounds, but is finding that there is simply no middle ground to be found.
Bill Mitchell has an interesting entry on his blog about the UK and the deal with the IMF in 1976
https://billmitchell.org/blog/?p=33907
In spite of all this, Keir Starmer still knows what his priorities are – the Ukraine. He is getting ready to travel to that country to discuss the possibility of deploying a post-war peacekeeping force there and just had a meeting with Macron about the same. The UK’s economy must be going great if he thinks that the UK can afford to send a chunk of their military there. You know, Starmer has a lot in common with Biden. No matter how bad conditions became in their own countries, their number one priority remains the Ukraine. And I suspect that even with all those budgetary pressures, that resources are still being sent by Starmer to the Ukraine. If he keeps this up he may face the same fate as William Wallace. The man is a disaster for the UK.