BRUMMER: Sterling’s rebound hopes

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Forgotten: when the reforms of Margaret Thatcher came into force, by 1990 the pound returned to the level of 2 dollars.

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Not surprisingly, the financial markets did not take Kwasi Kwarteng’s financial event well. The pound, which sank after Boris Johnson was ousted from Downing Street, is suffering from political instability, traders say.

The UK has a reputation for being financially disciplined, so the decision by the Liz Truss government to loosen the purse chains has unsettled the pound sterling and the pig.

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No official figures are available on the impact on public finances, but estimates at the National Institute of Economic and Social Research say that higher spending (mainly to bail out the energy market) and tax cuts would increase the government deficit by as much as £1. 150 billion

This will lead to an increase in the UK public debt as a percentage of national production to 91.6% in 2024-2025 – against a projected fall to 87.6% of GDP.

This may feed the doomster narrative, but it’s worth remembering that at these levels, this is a significantly lower debt burden than the US, Japan, and Italy, which are in the stratosphere. It is also lower than that of France, whose economy is not so different in size and structure from ours.

As a free-floating base currency, the pound sterling has been an easy target for speculators during a period of uncertainty. Clearly no one wants the pound to trade at $1.08, close to the 1985 low.

However, it is often forgotten that with the start of Thatcher’s reforms, by 1990 the pound returned to the level of $2. In the world of foreign exchange, nothing lasts forever.

Traders claim that Britain has become politically unstable since the Brexit referendum in 2016. Yes, there were four prime ministers. But they all belong to the same party, which was elected by a majority of 80 seats in 2019.

Compare this to, for example, Italy and Sweden, where neo-fascist parties already play or will soon play a role in government, and France, where the extreme right has 89 seats in the National Assembly.

This is something the markets really need to worry about.

The UK’s funding needs will rise sharply in the coming months. Debt Management faces the daunting task of raising an additional £72.4bn in the current financial year.

And this at a time when the Bank of England plans to sell £80bn of its £900bn quantitative easing assets over the next 12 months.

At the beginning of the summer, when Boris Johnson was desperate, the two-year yield was 1.7%. Prior to the Kvarteng event, the yield was 3.4%, and in the last auction it reached 3.9%.

How worried should we be?

The death of Queen Elizabeth II brought hundreds of world leaders to London. Among those present were many rulers of the Persian Gulf who had held British bonds and property for a long time and remain supporters.

Norwegian oil funds have preferred London to their Scandinavian neighbors, and at current levels, British bonds should become more attractive to less picky investors.

One thing is for sure: with inflation in double digits or close to it, Kwarteng should not follow the example of its predecessors and subscribe to more indexed bonds. Linking 25% of the British debt to retail prices was a blunder.

Freedom Pass

The Chancellor’s mini-budget hasn’t quite matched Big Bang 2.0 predictions, but the direction is clear.

Instead of hiding the removal of the cap on bankers’ bonuses in fine print, Kwarteng was refreshingly keen to make a virtue out of it.

The opportunity to remove the restriction is the Brexit dividend. As much as anyone hates fat cat bonuses, the freedom to set performance rewards will help Square Mile and Canary Wharf thrive.

It will also pay off debt, as financial services are a rich source of tax revenue, helping fund the NHS and Social Security.

Similarly, the decision to make it easier for pension funds to invest in illiquid assets such as infrastructure and startups should be positive.

Less attractive is the idea that funds could also put more money into private equity.

Returns can be attractive. But the destructive power of private capital, as seen in nursing homes, retail and defense industries such as aerospace pioneer Cobham, outweighs any benefit.

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