by Andy Bruce and Andrea Shalal
LONDON, Sept 28 (Reuters) – Britain’s financial markets remain under stress on Wednesday after criticism from the International Monetary Fund (IMF) and ratings agency Moody’s of London’s new economic strategy, which sent the pound plummeting and jump the cost of public debt.
The FTSE 100 index of the London Stock Exchange lost 1.47% in the middle of the morning and the FTSE 250, more dependent on domestic demand, dropped 2.75%. On the foreign exchange market, the pound yielded 0.47% against the dollar at the same time and on the government bond market, the yield on ten-year British bonds was around 4.5%.
Yields at 20 and 30 years exceeded 5% at the start of the session. The cost of financing public debt is thus heading for its biggest increase over one month since at least 1957.
The pound sterling has fallen more than 5% against the greenback since the presentation on Friday of the outline of the Truss government’s recovery plan, marked by massive but unfunded tax relief, which risks widening the budget deficit sharply.
Calls for Finance Minister Kwasi Kwarteng to change his plan have multiplied in recent days, especially as the crisis adds to the already strong tensions on the global fixed income markets.
“Given the high inflationary pressures in many countries, including the UK, we do not recommend large, untargeted fiscal packages at this stage as it is important that fiscal policy does not work against the monetary policy,” an IMF spokesman said Tuesday evening.
Remarks in which Jim Reid, one of the heads of investment strategy at Deutsche Bank, said he saw a “pretty scathing reprimand (..)”.
MOODY’S TALKS ‘SHOCK OF CONFIDENCE’
The intervention of the IMF is all the more noticeable as London had to call for help from the Fund in 1976, in the midst of the balance of payments crisis, which remains as a humiliating episode in the country’s economic history.
For its part, Moody’s estimated in a press release that the measures to reduce taxes and duties envisaged by London could have an adverse effect on the credit of the United Kingdom.
“A marked shock to confidence, linked to market concerns about the credibility of the government’s fiscal strategy, which have translated into a structural increase in funding costs, could permanently weaken the debt sustainability of the United Kingdom”, warns the rating agency.
Before the IMF statements, the chief economist of the Bank of England had explained that the latter should announce a “significant” rate hike at the end of its next monetary policy meeting in early November, and that it would take into account the impact of the current financial turmoil in its forecasts.
The central bank has already raised rates by more than two percentage points in recent months in an attempt to stem near-single-digit inflation.
A source at the Ministry of Finance had to deny information from Sky News on Wednesday that Kwasi Kwarteng was preparing, during a meeting with bankers, to ask them not to bet against the pound. (With William James and Elizabeth Piper, French version Marc Angrand, edited by Jean-Stéphane Brosse)