Bank of England governor Andrew Bailey deserves plaudits. I guess.
Earlier this week, while speaking at the Institute of International Finance annual meeting in Washington, he delivered an ultimatum of sorts. “My message to the funds involved and all the firms is you’ve got three days left now,” he said, ostensibly warning the UK pension complex to rebalance and unwind positions within 72 hours. The BoE wouldn’t be extending the emergency bond-buying program credited with short-circuiting what, in highly technical market parlance, is known as a “doom loop,” beyond a Friday deadline. “You’ve got to get this done,” he said.
Note my use of “ostensibly” above. The following day, the Financial Times said the BoE hadn’t actually adopted the kind of cold-hearted approach Bailey seemed to convey. Behind the scenes, the FT suggested, the bank was more conciliatory, “signal[ing] privately to bankers that it could extend its emergency bond-buying program.”
In short, Bailey’s ultimatum wasn’t to pension funds or bankers, it was to Liz Truss. Gilts would trade without a net starting next week. The market would render its judgment on the viability of Truss’s fiscal plan unimpeded by BoE buying. If gilts crashed, they crashed. If that triggered more margin calls and more forced selling among pension funds, so be it.
Bailey was bluffing, of course. The BoE wouldn’t allow a total meltdown in the UK bond market, but as I’m sure someone reminded Truss, markets move fast. A few harrowing days is all it would take to accelerate the margin calls on the LDI complex. If any additional BoE support came too late, Truss could be staring at a bailout.
With apologies to all the contrarians out there duty-bound to support Truss out of a misplaced, no-questions-asked allegiance to counter-narrative, this wasn’t the BoE’s fault. It just wasn’t. It was Truss’s fault, and on Friday she tried to make amends before Kwasi Kwarteng’s mini-budget collapses markets, the government or both.
Consistent with the first media reports from Thursday, Truss abandoned a pledge to freeze corporate taxes, which will rise as initially planned.
“It is clear that part of our mini budget went further and faster than the markets were expecting,” she said. “So the way we are delivering our mission right now has to change.”
Something else that “had to change” Friday was the Chancellor. Kwarteng, who rushed back to London after departing the IMF meetings in Washington early, was immediately ousted.
Read more: ‘You Have Asked Me To Stand Aside.’ Kwarteng Sacked By Truss
Truss said she was “incredibly sorry” that Kwarteng had to go. He’s a “great friend,” she added.
“We need to act now to reassure the markets of our fiscal discipline,” she went on to say, during a truly painful press conference. “This will raise £18 billion a year, and will act as a downpayment on our full medium-term fiscal plan,” Truss said, of the corporate tax increase.
Friday, you’re reminded, was the final day of the BoE backstop for long-dated gilts. Bailey was, in fact, playing a game of chicken with Truss, as suggested here earlier this week. And she swerved.
This is an embarrassment of epic proportions. And on multiple levels, not least of which is that Truss repeatedly criticized the BoE during the leadership race, only to undermine the bank’s inflation-fighting efforts, then lose a staring contest with Bailey. Tories are furious, citizens are worse off as a result of the market turmoil and Truss has the dubious distinction of presiding over a collapse in gilts and a selloff in the pound that took sterling to a record low versus the dollar.
Her position is untenable. Hers will be remembered as one of the most star-crossed, laughable stints at No. 10 in history.
On Thursday, Bloomberg recounted Bailey’s demeanor in Washington when news of the unfolding fiscal U-turn first began to circulate: “Asked by reporters whether dropping plans for a massive package of unfunded tax cuts would end weeks of turmoil in UK markets, the Bank of England governor refused to comment, but he smiled broadly.”
Truss wasn’t smiling on Friday. Asked why she should stay on as PM, she said the government “need[s] to make sure that we have economic stability.”
Does the entirety of this episode in British politics constitute 3-D Chess?
Truss is just incompetent. And I say that completely without malice.
Bookies are 13/16 on Truss exit in 2022. That means >80% probability?
I wonder how predictive bookie odds are, compared to prediction markets.
She should have appointed a lesser figure as Chancellor, but her choice of Hunt likely reflects continued delusion and arrogance. She probably thought that appointing a respected person would protect her position, but actually the only thing protecting her was the difficulty of identifying her replacement. She should have appointed someone competent but unknown and publicly instructed him/her to deliver what the markets want (U-turn). Now she’s going to get a U-turn forced upon her, and according to bookies, a rapid booting.
Just my guess.