Liz Truss’s ‘favourite’ economist says chancellor ‘took his eye off ball’ and ‘overstepped the mark’ with mini-budget
Prime Minister Liz Truss’s external adviser on the economy has told Sky News that the chancellor had “taken his eye off the ball” and “overstepped the mark” with his mini-budget.
Gerard Lyons, who is often referred to as Ms Truss’s favourite economist, said Chancellor Kwasi Kwarteng failed to adequately prepare the financial markets ahead of his announcement.
Speaking on The Take With Sophy Ridge, Mr Lyons said: “The chancellor, whilst he had focused on the general public and on British businesses, he had not really prepared the financial markets fully.
“And I think he had taken his eye off the ball slightly, shall we say, in having not prepared the markets for what he was doing in the budget and I felt that he overstepped the mark last week.
“So it was a combination of all three factors – the febrile markets because of the global backdrop, the actions of the Bank of England last Thursday, but let’s be in no doubt, it was primarily the mini-budget last Friday that triggered this latest series of events.”
Asked if he had had any conversations with Ms Truss or her team, Mr Lyons said he had “made my thoughts known”. He said he was “highlighting in my writing… about the febrile state of the markets and the need to keep the markets onside”.
Pushed on whether they had taken his advice, he said: “Well, sometimes people listen, sometimes they don’t, but there were positives that came out of it. But as we saw last Friday, there was just not enough in line with what the markets had been prepped for and were expecting.”
Despite his remarks, Mr Lyons said the budget was “very positive in many respects”.
He said it was “very much on a pro-growth agenda” which was needed to “break out of this low-growth phrase”.
Mr Lyons’s remarks about the chancellor failing to prepare the financial markets were contrasted by a minister who told deputy political editor Sam Coates it was “bulls***t” to say market movement was related to the mini-budget announcement.
And on The Take with Sophy Ridge, chief secretary to the Treasury Chris Philp denied the government had any responsibility and said there would be no change of course.
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“Getting Britain’s economy growing is so important. Important to raise wages and important to pay the tax bills of the future,” he said.
Mr Philp suggested benefits may not be hiked in line with spiralling inflation. He said a commitment by former chancellor Rishi Sunak to uprate benefits in line with inflation was under consideration amid reports different government departments have been asked to draw up plans for efficiency savings.
Mr Philp told ITV’s Peston: “We are going to look for efficiencies wherever we can find them.”
But he said the Treasury would not commit to an expected uprating of benefits in line with inflation.
Pressed about the decision, he said: “I am not going to make policy commitments on live TV, it is going to be considered in the normal way, we will make a decision and it will be announced I am sure in the first instance to the House of Commons.”
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On Wednesday the Bank of England was forced to launch an emergency government bond-buying programme to prevent borrowing costs from spiralling out of control and stave off a “material risk to UK financial stability”.
The Bank will buy as many long-dated government bonds as needed between now and 14 October in a bid to stabilise financial markets.
The announcement had an immediate effect on the market, with data showing 30-year bond yields fell back to 4.3%, having risen to levels above 5% not seen since 2002, earlier on Wednesday. There were similar falls for 20-year yields.
Ms Truss is expected to face public questioning about her economic plans for the first time on Thursday as she tours regional BBC radio stations in a morning round of interviews. Neither the prime minister nor the chancellor were anywhere to be seen or heard on the economy on Wednesday.
Andrew Bailey says Bank of England in period of ‘heightened tension’ after runs on Silicon Valley Bank and Credit Suisse
The Bank of England governor has told MPs the regulator is currently in a period of “very heightened tension and alertness”.
However, speaking to the Treasury Committee on Tuesday, Andrew Bailey said the country is not in a period comparable to the financial crash of 2008 – but that vigilance is needed.
He said: “I do not want to give you for a moment the idea that we are not very vigilant because we are, we are in a period of very heightened, frankly, tension and alertness and we will go on being [in that position].”
Stress testing of banks will have to include the fact that deposits can be withdrawn electronically in seconds, deputy governor Sam Woods added.
“A very striking feature of the Silicon Valley Bank run, not so much of the Credit Suisse run by the way, was just the speed with which it took place”, he said.
“We know all of us can move money from our accounts in the short time it has taken me to answer this question, as you say, that is a relatively new feature of the market.”
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Another relatively new development is the rapid transfer of information on social media, described as a noticeable phenomenon by Mr Woods.
“The other aspect that we’ve had and we have dealt with, by the way, in various situations in the past, but it’s more prominent is the speed with which news can travel, particularly among communities and sometimes sort of through private messaging groups, that is a noticeable phenomenon both here [in the UK] and elsewhere,” he said.
A learning point from the collapse of SVB is the speed with which money can travel, he added.
His comments follow the greatest financial turmoil since 2008 as the midsize lender SVB collapsed and its UK arm was subject to a last minute takeover by HSBC. Less than a week later the embattled second largest lender in Switzerland, Credit Suisse was forcibly merged with its rival UBS as its share price plummeted and clients withdrew money.
A difficulty faced by the tech companies and start-ups that banked with SVB was that many had their deposits all with SVB, rather than numerous banks, so when SVB’s share price plummeted depositors took fright and withdrew their money.
That problem may exist in the UK as Mr Bailey said holding many bank accounts can be hard for some new companies.
“Another point that I think we will naturally have to look at … is that something that businesses say to me and actually – particularly start-up businesses, but it’s not just start-up businesses – that opening many business accounts to get a sort of diversified range of banks is not easy.”
“There is I think a point there around the ease of account opening for businesses.”
FTX’s Sam Bankman-Fried charged with bribing Chinese officials
Disgraced FTX founder Sam Bankman-Fried has been charged with bribing Chinese officials with payments of $40m (£32.4m).
Prosecutors have accused him of directing the payment to unfreeze accounts belonging to his hedge fund linked to FTX.
The accounts of his trading firm Alameda Research, which Chinese authorities had frozen, are said to have held more than $1bn (£812m) in cryptocurrency.
Prosecutors claimed they were unfrozen after the alleged bribe payment was made around November 2021.
Bankman-Fried is accused of transferring tens of millions of dollars worth of extra crypto to complete the bribe.
The 31-year-old has already pleaded not guilty to eight counts over the collapse of FTX last year.
It ran out of money on 11 November after the cryptocurrency equivalent of a bank run.
Prosecutors say Bankman-Fried stole billions of dollars in customer funds to plug losses in Alameda.
He faces a total of 13 charges.
They include four counts which accuse him of orchestrating an illegal campaign donation scheme to buy influence in Washington DC.
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How worried should we be about the banks?
It’s a question that’s been hanging over the financial system since the collapse in the space of a fortnight of three moderate American banks, including Silicon Valley Bank (SVB), followed by Swiss behemoth Credit Suisse.
The spectacle of regulators, political leaders and bankers spending sleepless weekends managing insolvencies, bailouts and takeovers, against the red-ink backdrop of lurching markets, has stirred memories of 2008 and the financial crash.
The answer from Bank of England governor Andrew Bailey, repeated to MPs on the Treasury Select Committee on Tuesday, is “don’t panic”, not yet anyway.
Mr Bailey conceded that recent events made this a moment of “heightened tension and alertness”, but that comparisons with 2008 are erroneous and, so far, UK regulations introduced post-crash are passing the test.
His diagnosis is that while the issues that brought down SVB and Credit Suisse are distinct and separate, the interconnectedness of the financial system means the risk of contagion cannot be ignored.
SVB collapsed because of poor risk management, with deposits locked into fixed incomes investments that fell in value as interest rates rose. Credit Suisse meanwhile, after a decade of unerringly finding new scandals in which to become embroiled, finally stepped on a rake it could not recover from.
Mr Bailey found himself directly involved with the fallout from SVB, engineering the sale of its UK subsidiary to HSBC over a long weekend, with the deal only confirmed he said at 4am on the Monday, hours before markets reopened.
The actions taken by the Bank he said proved the value of new regulation.
SVB had a distinct UK presence because its British branch had grown to a point it was required to become a separate subsidiary. That in turn gave the Bank of England and the Prudential Regulation Authority options in managing its decline, one of which was a sale.
Mr Bailey and his colleagues did concede there are lessons to learn, primarily from the speed with which confidence and, crucially, deposits were withdrawn from the banks.
As a result they will re-examine whether the current bank “stress tests” governing liquidity – the amount of cash banks must have on hand to absorb shocks to the system – are adequate.
Technology may have helped change that calculation. In 2007 we knew Northern Rock was on the brink because customers were queuing outside branches. Today you can withdraw funds digitally in the time it takes to read this sentence, and a bank run could be underway by the end of the paragraph.
Deputy governor Dave Ramsden told MPs that messaging apps further accelerate the potential for bank runs, and said this was a factor in the SVB collapse, with the bulk of depositors all working in the tight-knit US tech industry.
“They were a tech-savvy group, already using messaging in ordinary situations, using it in a run situation.”
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The result was what Bailey called “the fastest journey from health to death since Barings”, a reference to the British investment bank that collapsed spectacularly in 1995.
But he insisted the issues are bank-specific and isolated, describing the jitters that have seen banks stocks rise and fall rapidly as markets “testing” various institutions, looking for weakness. The latest example came on Friday afternoon, when Deutsche Bank’s valuation fell without an obvious trigger only to recover on Monday.
“My very strong view of the UK banking system is that it is in a very strong position,” Bailey said. “But there are moves in markets to test out firms, they are not based on identified weakness, rather they’re testing out. There’s a lot of testing going on.”
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