Chancellor Kwasi Kwarteng’s backfiring mini-Budget would have triggered a £1.5 trillion meltdown in UK pensions, if the BoE hadn’t stepped in. Now the Bank has thrown in the towel.
Andrew Bailey pledged to spend £65billion buying gilts on September 28, in what seemed like a successful attempt to stop a doomsday loop destroying the nation’s final salary pension schemes.
Yet his emergency programme of temporary gilt purchases was intended to run for just 14 days, and it expires on Friday.
This morning there were rumours that Bailey would extend his scheme, with the Financial Times claiming he had signalled privately to bankers that it could extend its emergency bond-buying programme.
The normally reliable FT got it wrong.
Bailey has since told pension funds they have just three days to sort out their liquidity problems before his emergency bond market intervention ends.
That isn’t very long and nobody knows what is going to happen if pension funds can’t sort out their liabilities in time.
The clock is ticking. Soon, all hell could break loose.
Kwarteng’s mini-Budget on Friday September 23 ended in fiasco, as global markets were stunned by his decision to announce £45billion of unfunded tax cuts, paid for by borrowing.
This came fast on the heels of Prime Minister Liz Truss’s Energy Price Guarantee, which could cost the Treasury a staggering £150billion.
Bond markets were reluctant to lend money to a government that was playing fast and loose with the nation’s financial credibility.
Gilt yields rocketed from 3.10 percent to 5.20 percent, the highest in 14 years, as investors demanded a premium for buying UK government debt.
Kwarteng’s cavalier attitude made them wonder whether any UK politician will ever show the guts to tackle the nation’s spiralling deficit and debt mountain.
Pension funds were forced to sell bond holdings in a national “fire sale”, as they fought to meet margin calls on derivatives used to help them match their liabilities to members.
Disaster was only averted by the Bank of England’s swift intervention.
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The Chancellor has tried to rectify his mistakes, reversing his decision to axe the 45 percent additional rate tax band for the wealthy.
However, this will only save £2billion.
He has tried to boost the UK’s financial credibility by bringing forward his “medium-term fiscal plan”, which will set out how he intends to get the public finances back in shape.
The date he set for that is October 31. Which is Halloween, ironically.
It wasn’t enough to soothe spooked markets. Nor was his announcement that veteran civil servant James Bowler is to become the Treasury’s Permanent Secretary.
In another climbdown, Kwarteng pledged to restore oversight financial oversight from the Office for Budget Responsibility (OBR).
Yet bond markets are still in panic mode.
Kwarteng is running out of options and Bailey is refusing to help.
The BoE has warned that the UK’s dysfunctional pensions system poses a “material risk” to the nation’s financial stability. We will find out how material that risk is on Friday.