The new British Prime Minister, Liz Truss (Lapresse)
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The markets are swept by fear and great uncertainty, but investors are looking to the United Kingdom rather than post-election Italy, with the victory of the center-right coalition led by Giorgia Meloni. Such a storm, with the collapse of the pound to its most basic levels ever and the sharp rise in the yield of British government bonds, which has infected the bonds of other European countries,had not been seen in 30 years, when Britain was forced to abandon the Monetary System European (We are). We Italians remember this well, because the crisis also overwhelmed the lira, pushed out of the EMS together with the pound.
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Then it was the speculation with George Soros’ bearish bet that ignited the markets; today the origin of the currency crisis that is shaking the City to Downing Street. On Friday, the government led by Liz Truss announced tax cuts, especially for the benefit of higher incomesfor 45 billion pounds (about 50.4 billion euros at the current exchange rate), measures that will be financed in debtsaid Chancellor of the Exchequer Kwasi Kwarteng.
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It is the biggest tax cut in the last 50 years. Fears that tax cuts could inflate public debt and further fuel expensive living as the UK teeters into recession.Inflation, which in Britain at 9.9%, the highest among the G7 countries, is eroding real wagesunleashing the discontent and protests of the workers. The strikes in the railway and post office sectors, to ask for increases in paychecks, were only suspended by the unions, due to the death of Queen Elizabeth II. But the railway workers have already announced that they will return to stop from 10 October. It’s just the latest of a wave of unrest in various sectors of British industry, to demand better conditions and wage adjustment to the rapidly rising cost of living.
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The collapse of the pound only makes the situation worse. The British currency fluctuated around 1.08 against the dollar on Monday afternoon, but early in the morning the British currency sank to 1.035 against the dollar, the lowest ever since the decimalization of the currency in 1971. In the fixed income sector, the 10-year UK government bond yield soared to 4.13 compared to the 3.5% recorded on Friday before the announcement of the maxi tax cut.
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Uncertainty has spread across the continent. And, as always, the most fragile economies suffer the most. The 10-year BTP yield rose to 4.48%, while the spread reached 239 points. Greece’s 10-year government bond yields jumped to 4.68%, the Spanish to 3.27%, but even the German Bunds are now yielding 2.09%, while up until a few months ago they were negative.
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The Bank of England (BoE), which raised the rate by 0.50 percentage points to 2.25% on Thursdayit may need to meet urgently for another rally in support of the pound. It would be an unusual move. Since becoming independent of the Treasury in 1997, the Bank of England has not raised interest rates outside of scheduled monetary policy meetings. S.ul the derivatives market for a 0.75% upside intervention within a week and then on a further increase of over one and a half points by November, when the next meeting is scheduled. And if today the cost of money is 2.25%, expect it to reach 6% by May.
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Late Monday afternoon, the Bank of England intervened with a note but failed to reassure the markets. The central bank said it is closely monitoring the markets and will not hesitate to raise interest rates to curb inflation. they can inflate public debt and fuel further inflation as the UK teeters into recession. The bank said it will fully assess the government’s fiscal and spending commitments before the next November meeting and that will not hesitate to change interest rates to the extent necessary to bring inflation back to the 2% target sustainably in the medium term.
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The problem chand the rise in interest rates damages the economypenalizing investments, e weighs on savers, weighing them downor m rateautowhile high inflation eats away purchasing power. A deadly mixture.
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The opposition therefore reacted harshly. At the Labor Party ConventionCFO Rachel Reeves spoke of national emergency and defined the chancellor of the exchequer, Kwasi Kwarteng, and Prime Minister Liz Truss due desperate gamblers chasing their losses at the casino.
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The markets are waiting for Giorgia Meloni’s first steps to put her to the test – from the formation of the new government to the economic maneuver – right now, investors are looking elsewhere.
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