Not a Liz Truss Moment
Genevieve Signoret & Delia Paredes
(Hay una versión en español de este artículo aquí.)
(We can’t decide whether this is a macro fundamentals piece or a global markets piece, so we’re cross-posting it on Timón Económico and on Genevieve’s solo blog, La Carpeta Negra.)
Since Chancellor Reeves presented her budget on Wednesday 30 October more than once now we’ve heard the question, does this constitute a “Liz Truss Moment”? The question refers to the Gilt market crisis sparked by then Chancellor Kwasi Kwarteng’s presentation of the Truss government budget on 23 September 2022.
The answer is no. While it’s true that Gilt yields have moved up some in immediate response to Chancellor Reeve’s budget, the two episodes—the 2022 crisis and this current event—contrast sharply. And they do so in three ways:
- The budgets themselves differ sharply.
- The immediate market response has so far differed sharply.
- And the policy response to the market response will almost surely differ sharply.
The Budgets Differ Sharply
In both episodes, the budgets called for increased borrowing, and this call made markets nervous. But, in 2022, the offending budget called, moreover, for £45 billion in unfunded tax cuts. This 2024 budget entails more borrowing, yes, but also tax increases.
A second difference pertains to the process. We’re wading into a dry subject here, we realize, but bear with us, because it’s important. Bond market participants need to trust that budget projections are coherent and that they’ve gone thorough review. In 2022, because the budget was put out without having undergone assessment by the Office for Budget Responsibility (OBR), it seemed thrown together. Also, it lacked transparency. The Reeves budget, by contrast, did undergo OBR assessment prior to its release.
The Market Responses (So Far) Differ Sharply
In both 2022 and 2024, the yield on a 10-year Gilt market rose abruptly in response to the budget. But this time around the response has been milder and, we think, will be shorter.
The Policy Response to the Market Response
If we’re reading markets correctly and so are on target in our outlook for the market response to the 2024 Reeves budget to be far milder and shorter than it was following 2022 Kwarteng budget debacle (“the Truss moment”), then there will be no need for any type of policy response whatsoever. By contrast, in 2022, the policy response was dramatic: the Bank of England intervened in the Gilt market, and then, not only did Chancellor Kwarteng resign, but the entire Truss government collapsed.
In 2022, the Bank of England was forced to intervene
Back in 2022, starting five days after the budget was presented, the Bank of England ended up having to buy up 19.3 B pounds in Gilts. And that’s not all. There were other measures, including liquidity support to the pension fund sector.
Now, it’s early days still, but so far we’re not picking up any market signals indicating that a central bank intervention will be necessary.
And the government collapsed
And then of course you have the 2022 fallout onto the chancellor himself, his boss, Liz Truss, and their entire government. Kwasi Kwarteng resigned as Chancellor of the Exchequer on 14 October, and Liz Truss’s government fell shortly afterward. Truss’s 45-day tenure was the shortest of any UK Prime Minister in history.
This time around, despite some market jitters and the normal wave of budget scrutiny and criticism within and outside the UK, I’m not expecting the government to come crashing down.
Don’t Succumb to Market PTSD
In an interview last Friday at Times Radio, Genevieve was asked whether it was true what the UK Government was saying, that the reason yields were up was that markets were suffering from post-traumatic stress syndrome (PTSD).
Her response? It’s quite normal for yields to go up when an already heavily indebted government announces expanded borrowing. After all, more borrowing means larger risk. But it’s also true that to compare the ongoing episode to the Liz Truss Moment is simplistic, and simplistic thinking can lead to poor investment decisions.
Let us all, then, avoid succumbing to market PTSD.
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