Treasury on rack as end of easy money wreaks havoc

When Jeremy Hunt stood up at the dispatch box to deliver his sound-money Budget, the Chancellor’s mind must have been in two places at once.

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

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

For, in a cruel twist of fate, the bond markets that had done for his predecessor were causing a full-scale global banking meltdown.

Hunt was rushed into the Treasury late last year by then-prime minister Liz Truss to clean up the mess that she had created with her chancellor Kwasi Kwarteng.

Kwarteng’s mini-Budget of tax cuts led to a sharp sell-off in UK debt as the all-powerful 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 that would be repeated on his watch.

But the reality was that, when he stepped up to the dispatch box at lunchtime yesterday, the Chancellor and his counterparts worldwide were in the middle of a battle to stave off a fresh financial crisis.

The trouble started for Hunt on Friday night as the UK arm of Silicon Valley Bank (SVB) teetered on the brink of collapse after its parent company in America was taken over by US regulators.

SVB was the go-to lender for thousands of British technology companies and, according to Tech London Advocates founder Russ Shaw, if it had been allowed to fail the industry would have been ‘decimated’.

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

The Chancellor hoped at the time the deal would calm the markets and give him a steady platform for his Budget but instead the situation escalated as contagion fears spread.

In London yesterday morning, as Hunt was making his way to the House of Commons, HSBC, Barclays, Lloyds and NatWest all sold off sharply while the FTSE 100 was tanking.

So bad had the situation got that HSBC’s top bosses called on employees at the rescued arm of SVB in the UK to assure clients ‘their deposits are safe and loans are supported’. 

Against this backdrop Hunt, who had heavy bags under his eyes, got up and said in his speech: ‘Over the weekend, I worked night and day with the Prime Minister and the Governor of the Bank of England to protect the deposits of thousands of our most cutting-edge companies.

‘We successfully secured the sale of the UK arm of Silicon Valley Bank to HSBC.’

But, while he was talking, the real trouble was developing in Europe after Credit Suisse’s largest investor said it would not provide the Swiss bank with any more financial assistance.

Trading in Credit Suisse’s shares had to be briefly halted, while Societe Generale, BNP Paribas, Monte dei Paschi and Unicredit were also suspended after sharp falls.

BlackRock’s chief executive Larry Fink added fuel to fire, telling his investors in a letter that they now face a ‘slow rolling crisis with more seizures and shutdowns coming’.

The founder of the £7.2trillion money manager said that SVB’s collapse was an example of the ‘price we’re paying 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, the US Treasury’s bonds have swung wildly as the era of free money dries up.

Investors have been dumping government bonds as central bank rate rises offer better returns elsewhere, eroding the value of bond holdings at major banks, which use them to offset even riskier investments. It has caused massive paper losses and bank stocks have sold off accordingly as panic has kicked in.

In the 1990s the Clinton administration had big problems trying to control the bond markets after heavy federal spending spooked the markets.

Bill Clinton’s lead political adviser James Carville said at the time: ‘I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter.

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

How Chancellor Hunt must feel the same way.