Pension funds crisis forces £65bn bailout by Bank
♦ ‹Emergency action after gilt crisis threatens financial stability ♦ ‹Number 10 adamant that Chancellor will not resign ♦ ‹Cabinet ordered to make savings in the public sector
BRITAIN’S pension funds were yesterday at the centre of the financial crisis sparked by the mini-budget forcing the Bank of England to launch a £65 billion emergency bailout.
The Bank warned of a “material risk to UK financial stability” and stepped in to buy long-term gilts, as plunging markets for UK debt sent borrowing costs spiralling and forced pension funds to dump their assets. Economists compared the crisis to the run of withdrawals that led to the collapse of Northern Rock in the credit crunch of 2008.
However, the move by Andrew Bailey, the Governor of the Bank of England, helped restore some calm to markets, and pensions experts said retirement pots were not under threat.
Nevertheless, worries that Kwasi Kwarteng’s radical mini-budget will trigger further shocks for investors in gilts wiped billions of pounds off the stock market value of Britain’s biggest pension funds. Last night pressure was mounting on the Chancellor to take further action to reassure markets, as Downing Street dismissed any suggestion he would resign. Senior bankers warned Mr Kwarteng in a crisis meeting yesterday morning that his scheduled announcement of a “medium-term fiscal plan” to get public borrowing under control was “way too far away”.
Lord Clarke, chancellor under John Major, last night told ITV’S Peston show: “I’ve never known a budget cause a financial crisis like this, and I think the Government and the Bank of England are still going to have to act to calm it down and get us back to normality.”
Liz Truss, the Prime Minister, and Mr Kwarteng are planning to speak publicly for the first time in days today when they give brief TV interviews.
In a further attempt at reassurance, the Treasury will let it be known that it will be sending letters to all government department heads to tell them they must find efficiencies and stick within spending limits.
Amid pressure on the Government to help lower income families, Chris Philp, Chief Secretary to the Treasury, refused to confirm whether benefits would be uprated in line with inflation, a promise Rishi Sunak made as Chancellor. Asked on ITV last night if he would commit to a 10 per cent rise in universal credit and pensions, Mr Philp said: “I’m not going to make policy commitments on live TV”.
Tory MPS publicly and privately spoke of their alarm at the financial fallout, with Tory MP Simon Hoare saying: “This inept madness cannot go on.”
Sir Keir Starmer, the Labour leader, called for Parliament to be recalled immediately to discuss the crisis. It is not due back until the week after next.
The political backlash is likely to overshadow the Conservative Party’s annual conference that starts on Sunday. Mr Sunak, who lost the Tory leadership contest after warning of the peril of cutting tax amid soaring inflation, has decided not to attend.
Criticism on the Tory benches is yet to turn into a full-blown Commons rebellion, with much depending on unfolding events in the coming days.
The Daily Telegraph can disclose that one of Ms Truss’s most prominent economic supporters and informal advisers warned government figures of the danger of spooking the markets with the mini-budget. Gerard Lyons said: “I did warn them quite explicitly about the need to be aware of the febrile state of the markets, how they needed to make sure the markets fully understood what they were doing and that they mustn’t spook the markets. I did this a week anda-half before the mini-budget and again in the days right before the statement.”
The Bank hopes to halt a domino effect in the City by temporarily suspending plans to offload £80billion of gilts held on its balance sheet. Instead, for 13 days it will revert to buying them at a rate of £51billion per day using newly created money in a process known as quantitative easing.
The measures sparked a sharp rally in the market for the 30-year gilts that pension funds had been forced to sell. The cost of such borrowing fell by more
than one percentage point, a significant downward move. Meanwhile, the pound fell after the Bank’s announcement on fears of further inflation but recovered to finish roughly flat at nearly $1.09 against the dollar.
There were growing fears that the fallout from the mini-budget could deepen a recession rather than boost growth as it was intended to.
The Bank said the crisis in markets threatened a “tightening of financing conditions and a reduction of the flow of credit to the real economy”.
Mortgage providers withdrew a record number of offers and large companies were facing their highest ever borrowing costs, marking a sharp turnaround from recent years when cheap money was readily accessible.
Senior business figures criticised the Government. Michael O’leary, the chief executive of Ryanair, said the Government’s spending plans are “nuts” and claimed “they could bankrupt the UK economy in the next two years”.
Sir Martin Sorrell, the advertising boss, told Bloomberg TV that the minibudget
‘The Chancellor must use every opportunity to show he has a robust plan to pay down debt’
was “like a CEO and CFO reducing revenues and increasing costs without a plan”.
However, Tony Danker, director general of the Confederation of British Industry, struck a conciliatory tone and praised Ms Truss’s goal of boosting economic growth to 2.5 per cent.
But he said it was critical to address the inflation crisis and the turmoil in markets first.
“The Chancellor must use every opportunity to show that he and the Bank of England are co-ordinating on inflation and that he has a robust plan to pay down debt in the medium-term,” Mr Danker said.
“Every day, every week, every month, the Government will now be critiqued by markets and businesses on how serious they are about growth and about their fiscal responsibility to pay back debt.”
Traders trimmed back their predictions for interest rate rises, anticipating the base rate will rise to 5.75 per cent next year. Such a level would be very high by recent standards, but below the 6 per cent or more anticipated before Mr Bailey started buying bonds.
Samuel Tombs, at Pantheon Macroeconomics, said jumping from 2.25 per cent now to 6 per cent early next year “would imply that many households and businesses simply would not be able to keep up their monthly loan repayments, and pension funds could not meet their obligations, threatening financial stability”.