ALEX BRUMMER: The Bank of England opens a new front

Mark Carney had just finished an IMF interview with a US television channel in the wake of Brexit when he casually remarked to the traveling press that sterling’s stability would depend on the ‘kindness of strangers’.

Several years after the comments of the former governor of the Bank of England and the muddled handling of the gold market turbulence by his successor Andrew Bailey, that prediction could unfortunately become reality.

The mini-fiscal fiasco and the Bank’s interventions in the bond market to save defined benefit plans have tested confidence in Britain as a safe place to invest.

The UK has a significant current account deficit, which has widened due to the Brexit and pandemic adjustment.

But as a favored European destination for foreign investment and a country with a strong inflow of income from the operations of British international companies abroad, financing never seemed a real concern.

Indeed, because many of these global entities have large dollar-denominated revenues, they are benefiting from the sterling depreciation of about 20 percent in 2022. The Bank of England’s latest Financial Stability Report raises a red flag about external financing.

One wonders why on earth anyone should take note of the bank’s warnings, given its own failings in following its 2018 warning about using liability-driven investments (LDIs) in repairing the gaps in UK pensions .

Nevertheless, despite the current turmoil, which has undermined confidence in gold-plated and British pounds, the Bank’s words must be taken seriously.

It notes that the UK’s current account financing is supported by a positive net investment position – the inflow of capital and income from the investment of UK entities abroad.

But nothing is forever. Reliance on strangers and friends to fund the UK’s needs could turn just as quickly as government bond market sentiment.

If the normally enthusiastic interest of foreign investors in UK assets and overseas acquisitions continues unabated, the Bank says there could be tighter credit conditions. In other words, higher interest rates for UK businesses and households.

In addition, because some of the UK’s overseas holdings are leveraged, there could also be refinancing risks in an volatile global economy. None of this really takes into account foreign interest in British high tech, pharma, satellites and much more.

Yet Britain has never needed its friends in the Gulf, Norway, France (a huge investor in new nuclear energy) and the US.

Tax withdrawal

In the appendices of the International Monetary Fund’s Fiscal Monitor’s online report is a mind-boggling table.

It shows the ratio between gross government debt and national output, an important measure for assessing fiscal sustainability.

According to this ranking (prepared before Kwasi Kwarteng’s mini-budget), the UK’s debt-to-GDP ratio is 79.9 percent, falling to 68 percent in four years.

Compared to most of our competitors in the richest countries of the G7, it makes Britain look a lot better than the rest.

With the exception of Germany, where the debt-to-GDP ratio is 71.1 percent, the others start with a deficit well above 100 percent, with Japan at 263.9 percent and the US at 122.9 percent.

The UK figures are unsafe due to Kwarteng’s decision to reverse the increase in corporate income tax and national insurance contributions.

But even in the worst-case scenario of the Institute for Fiscal Studies, which estimated the mini-budget cost at £60 billion, it won’t shift the debt burden much unless it builds four years of staggering growth.

Then why the market tricks? The IMF, which reacted harshly to the Chancellor’s fiscal event, is pulling out completely and has embarrassed the British government.

Fiscal head Vitor Gaspar has gone out of his way to praise the Treasury, the Bank of England and the Office for Budget Responsibility (OBR) as well-functioning institutions. And he’s looking forward to the October 31 OBR report.

What a change from above.

Missing person

Catherine Mann, a member of the Bank of England’s monetary policy committee, was set to become the star at the Peterson Institute for International Economics today.

The event has been canceled as the edge of the abyss for the intervention of the Bank’s gilts is approaching. Wondering why?