““The currency crisis in the reserve currency could have global consequences. I’m surprised we haven’t heard anything from the IMF.“
Former US Treasury Secretary Larry Summers fears the UK’s new Prime Minister Liz Truss could trigger a global crisis if the government does not act to stem the bleeding in local government bonds and the pound.
As the pound is considered the international reserve currency, Summers said in a series of tweets on Tuesday that the UK’s balance of payments crisis could spread beyond Britain’s borders.
Given the growing threat of a crisis, he said he was “surprised” that the International Monetary Fund had not yet come forward.
Summers said he would not be surprised to see the pound fall to parity with the US dollar and the euro against the euro last week.
But on Tuesday he said he was surprised by the rate at which the British currency has fallen over the past two days.
The pound fell against British government bonds against the Truss government’s proposed meager budget, which includes tax cuts and billions of pounds in energy subsidies that will leave British households struggling to pay heating bills as they face record inflation. In recent memory.
watch out UK 10-year gilts rise 4% as investors brace for aggressive Bank of England move to tame tax cuts
Summers slammed the budget as “absolutely irresponsible” and said that “the tendency for long-term rates to rise as the currency depreciates is a sign of a lack of credibility”.
This weakened pound combined with rising productivity could lead to a vicious cycle as the UK’s trade deficit increases due to energy costs, Summers said.
Summers added that he would not be surprised to see a three-fold increase in short-term gilts yields over the next two years, eventually increasing to more than 7 percent.
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In the process, London’s status as an international financial center may suffer.
The pound bounced back on Tuesday as the greenback pulled back after hitting a 20-year high. But the UK currency is still fetching just $1.08, above its lowest level since the 1980s.
Meanwhile, UK bond yields continued to rise, with 10-year gilt TMBMKGB-10Y;
While yield hit 4.373%, 2-year gilt TMBMKGB-02Y;
It is down to 4.441%.
British shares were on track to finish slightly higher on Tuesday after the FTSE 100 UKX.
The UK’s benchmark stock index hit its lowest close since June on Friday.