Kwarteng: was it naivety, incompetence or intellectual arrogance?

Fears that many of Britain’s biggest pension funds were close to collapse were behind the Bank of England’s unprecedented intervention in the gilts market on Wednesday to buy-up to £60 billion of government debt.

In a highly unusual move, the Bank announced mid-morning that it would be buying long-term gilts every day for the next two weeks because of the “significant repricing of UK and global financial assets” which has occurred since Kwasi Kwarteng’s mini-maxi Budget last Friday. 

What’s more, the Bank warned that this repricing had become more significant in the past 24 hours and could have led to significant problems not only in the long-term gilts market but for financial stability. 

That’s the Old Lady’s code for meltdown: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”

And these were real fears. According to SkyNews, the Bank adopted its shock and awe tactics after becoming aware that pension funds were having problems matching liabilities. Funds have come under pressure because of the big jumps in gilt yields with 30-year gilts moving from one per cent a year ago to over 5 per cent. 

At the heart of the problem facing the “defined” pension funds are the so-called Liability Driven Investment (LDI) funds, which are designed to ensure the pension funds have enough assets to cover future liabilities. But, because the gilt markets have been so turbulent, pension funds which have hedged themselves against low yields have had to raise more money to put into the LDIs. And that’s the problem: to raise the cash they have had to sell gilts – which has pushed down prices – but forced yields up as fewer investors want to buy the debt. 

Which is why the Bank has stepped in to restore order, hoping to bring prices down and taking the heat out of the market.  

But not the heat off the politicians. Quite the reverse. Calls for Kwasi Kwarteng to resign over what some say is the most ill-judged and worst presented quasi-Kwasi-budget for decades are growing, and not just from the opposition but some of his own MPs too, particularly Rishi Sunak’s supporters. 

Yet it’s not so much the raw meat of Kwarteng’s budget which has so upset the markets – most of which has been known about for weeks – but the sheer arrogance with which he delivered his supply side reforms and tax-cuts.

As one analyst said: “We knew most of what was coming. But when you announce a budget like this you should be taking everyone with you: It’s all about the execution. Instead we got naivety and arrogance. And you never announce something like this on a Friday – that’s when markets are at their thinnest.”

So far Kwarteng is staying quiet, hoping to ride out the storm. But that could be another mistake. Instead of explaining his growth plan in more detail – to both the public and overseas investors – he sent out his City minister, Andrew Griffiths, to defend their actions. That looked bad too: arrogance or incompetence. Difficult to tell. While Griffiths was right to say that every country in the world is going through chaotic times, blaming the global outlook came across as pathetic and weak.

What the financial markets – and investors – crave is communication. Which is why if Liz Truss and Kwarteng want to survive, they should recall parliament and bring forward their forecasts from November. That would be the smart thing to do.

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