Treasury on rack as end of easy money wreaks havoc

When Jeremy Hunt stood at the letterbox to hand over his budget with solid money, the Chancellor must have been in two places at once.

Hunt had promised a return to Treasury orthodoxy – by restoring Britain’s reputation after the Trussonomics horror show last September.

While the speech put the Conservatives back on track, his hopes that it would be done against a backdrop of calm were dashed.

Because, in a cruel twist of fate, the bond markets that had preceded its predecessor caused a massive global banking collapse.

Hunt was sent to the Treasury by then Prime Minister Liz Truss late last year to clean up the mess she had caused with her chancellor Kwasi Kwarteng.

Quarteng’s mini-budget of tax cuts led to a sharp sell-off of British debt as the almighty bond markets made it clear to the then Chancellor that the country could not afford them.

Hunt wanted to do his utmost to make sure nothing like this happened again during his watch.

But the reality was that, as he stepped to the mailbox at lunchtime yesterday, the Chancellor and his global counterparts were in the middle of a battle to avoid another financial crisis.

The problems started for Hunt on Friday evening when the British branch of Silicon Valley Bank (SVB) was on the verge of collapse after its parent company in America was taken over by US regulators.

SVB was the lender of choice for thousands of UK technology companies and, according to Tech London Advocates founder Russ Shaw, the industry would have been ‘decimated’ had it gone bankrupt.

Hunt and his colleagues at the Treasury worked all weekend to find a buyer and on Monday morning it was announced that HSBC would step in and take over SVB UK for £1.

At the time, the chancellor hoped the deal would calm markets and give him a stable platform for his budget, but instead the situation escalated as contagion fears spread.

In London yesterday morning, as Hunt made his way to the House of Commons, HSBC, Barclays, Lloyds and NatWest all sold sharply as the FTSE 100 tanked.

The situation was so bad that HSBC’s top bosses called on employees of the rescued UK branch of SVB to reassure customers that ‘their deposits are safe and loans are backed’.

Against this background, Hunt, who had heavy bags under his eyes, stood up and said in his speech: ‘Over the weekend I have worked day and night with the Prime Minister and Governor of the Bank of England to protect the deposits of thousands of our most progressive businesses.

“We successfully secured the sale of Silicon Valley Bank’s UK branch to HSBC.”

But as he talked, the real problems started to develop in Europe after Credit Suisse’s biggest investor said it would stop providing financial support to the Swiss bank.

Trading in Credit Suisse shares had to be suspended for a while, while Societe Generale, BNP Paribas, Monte dei Paschi and Unicredit were also suspended after sharp price falls.

BlackRock CEO Larry Fink added fuel to the fire by telling his investors in a letter that they are now facing a “slowly advancing crisis with more repossessions and closures on the way.”

The founder of the £7.2 trillion money manager said the collapse of the SVB was an example of the ‘price we pay for decades of easy money’.

And for Hunt – as for predecessor Kwarteng – the underlying problem behind it all was the bond markets. As Fink mentioned, US Treasury bonds have been swinging wildly as the era of free money dries up.

Investors are dumping government bonds because interest rate hikes from central banks yield better returns elsewhere, eroding the value of bond holdings in big banks, which use them to offset even riskier investments. It has caused massive paper losses and bank stocks have sold accordingly as the panic set in.

In the 1990s, the Clinton administration struggled to control bond markets after heavy federal spending sent shockwaves across markets.

James Carville, Bill Clinton’s chief political adviser, said at the time, “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball batter.

“But now I would like to come back as the bond market. You can intimidate anyone.’

No matter how Chancellor Hunt must feel.