By Guillermo Ximenis
London, Sep 29 (EFE).- The UK government must clarify its economic strategy to mitigate the bond market crisis and pound sterling jitters, the group chairman of Standard Chartered José Viñals told Efe.
“It’s essential that the British government clarifies as soon as possible how it will balance public accounts in order to restore confidence in the sustainability of public debt and the whole of the United Kingdom’s finances,” Viñals said.
The UK’s new prime minister, Conservative Party leader Liz Truss, and her finance chief Kwasi Kwarteng, have ordered the biggest tax cut in half a century with a plan that involved a tax break for the highest earners. It is set to cost state coffers some 45 billion pounds ($50 billion).
Following the announcement of Kwarteng’s so-called mini budget last week, the pound slumped towards dollar parity and 10-year interest on government debt bonds skyrocketed to levels similar to those of Greece — 4.6% at its peak.
The Bank of England was forced to intervene, buying up government bonds to stabilize the market and protect pension funds.
The reaction of the market was “extraordinarily virulent” and “remarkably intense for such an important economy,” said Viñals, a former financial counselor at the International Monetary Fund and a deputy governor of the of the Bank of Spain
Despite the market chaos, Truss has doubled down on her fiscal policy, insisting that her plan will pay off with an economic boost.
“The aim of the measures is one I support, which is to encourage economic growth, but the question is whether these are the measures required to achieve that. The market verdict has been negative as of now.”
He added: “They have announced some serious tax cuts but without clarifying what the global framework of public finances is, how they affect the deficit and what other compensatory income or expense measures there could be,” the head of Standard Chartered, which operates directly in 59 countries and is active in 140 overall, added.
“This has raised doubts about the sustainability of public finances in the United Kingdom,” he added .
“For all these reasons, the markets have reacted with very significant increases in interest rates on public bonds.”
The economist highlighted the importance of sterling stability for international markets as one of five currencies that forms part of the IMF’s foreign exchange reserves.
The BoE is due to invest 65 billion pounds in government debt purchases over the next two weeks in a bid to smoothen out market reactions by November 3, when it hosts its next monetary policy committee.
The central bank is expected to raise interest rates shortly thereafter.
Kwarteng is due to set out his medium-term fiscal plan on November 23. EFE