Kwasi Kwarteng’s ‘mini budget’ will be remembered like a forklift truck disaster video

Welshcake

welshcake@iongroup.com

Welshcake sees the funny side as bunga bunga returns

The return of 85-year-old former prime minister Silvio Berlusconi to Italy’s corridors of power, and the UK scrapping banker bonus caps, are sure signs that the good old days are ours again. Unfettered, exuberant joy — the kind we used to know — can only be just around the corner.

So don’t sweat about rate hikes, ballooning credit spreads and crashing currencies. Give it a month and we’ll all be perma-tanned, leveraged to the hilt on CPDOs and drinking champagne off somebody else in a swimming pool.

Berlusconi himself must appreciate the comedy of his latest of many political resurrections. After all, it comes nine years on from “The Immortal” being forced out of the upper parliament for tax fraud, and while he is still embroiled in a criminal trial over his allegedly erotic parties. That he forged his comeback by telling jokes on TikTok makes it all the more adorable.

I really believed the electoral victory of a coalition led by Giorgia Meloni’s far-right party, the Brothers of Italy, would be Europe’s next shoe to drop (the winter energy crisis being a given). But markets have so far barely registered a ripple.

This is partly due to a suspension of disbelief about Meloni’s attitude to the EU. And because another new prime minister, Liz Truss, has proved far more tradeable. On her first day as Tory leader, she visits our beloved Queen Elizabeth II, who promptly dies. Then Truss appoints a chancellor whose first speech sparks a crisis in sovereign gilt paper and a run on the pound. Kwasi Kwarteng’s “mini budget” will be remembered like a forklift truck disaster video.

Fantasy becomes reality

Truss rocked me out of my post-summer vacation haze, during which I’d binged on fantastical TV like House of the Dragon, The Rings of Power and Welcome to Wrexham. Her new fantasy drama provided a far-fetched but nail-biting, watch-from-behind-the-sofa opening episode. Suddenly Turkey, with its spiralling inflation and calamitous central bank rates decisions, does not seem a world apart. Nor does Mordor.

Okay, the UK is not quite yet propping up the National League of the global economy. But we have witnessed the incredible sight of UK five-year CDS tripling to 45bp pandemic levels.

Meanwhile, tax handouts go almost entirely to society’s top end, and the Bank of England retreated from an expected 75bp September hike to just 50bp because it doesn’t see the cuts as inflationary — any ‘growth’ will only be in assets like houses and securities.

Truss and Kwarteng have scored a massive own goal. Pressure is heaped on the BoE to hike rates to save the pound, even as investors run the rule on the plans’ unfunded debt cost, while its emergency intervention only undermines confidence in the government’s credibility.

The debacle is a warning that the government may consider other bold and risky plans. The return of banker perks front runs the start of a quest to deregulate financial markets by ripping up financial rules relating to things like Mifid and Solvency II by the end of 2023. “Unshackling the City” from Brussels is music to the ears of Brexiteers, but losing regulatory equivalence is the surest way to unshackle major banks and their capital from British shores. That won’t help bonuses, no matter how cheap an eviscerated pound makes bankers look.

In Wales the picture is bleak. That’s the norm, but only 12% of my people think Truss will make the right decisions for the country, according to an ITV Cymru Wales and Cardiff University poll on YouGov. This compares unfavourably even with the 18% who self-report on national surveys as hazardous drinkers.

Truss could take a leaf from King Charles III, who delivered his first speech to the Welsh Parliament entirely in Welsh. Or better still from Ryan Reynolds and Rob McElhenney, whose grasp of the language is more comical but have conjured an underdog fairy-tale from the ashes of Wrexham AFC. The wider Union needs some of this spirit of hope. One can only imagine the state of the pitch if Truss and Kwarteng had bought in.

As Berlusconi takes his seat, the UK is choosing the punchline to his best-known joke: death, but first a little bunga bunga.

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Global credit funds & CLO's

October 2022 | Issue 249

Published in London & New York.