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Treasury on rack as end of easy money wreaks havoc

Uncertainty: As Chancellor Jeremy Hunt headed for the Commons, HSBC, Barclays, Lloyds and Natwest all sold off sharply as the FTSE 100 soared

Treasury on the rack as the end of easy money takes its toll: Bond market crash fears cast a shadow over Hunt’s budget

When Jeremy Hunt got 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 – restoring Britain’s reputation after the horror show that was Trussonomics last September.

While the speech put the Tories back on track, his hopes that it would come amid calm were dashed.

Uncertainty: As Chancellor Jeremy Hunt headed for the Commons, HSBC, Barclays, Lloyds and Natwest all sold off sharply as the FTSE 100 soared

Uncertainty: As Chancellor Jeremy Hunt headed for the Commons, HSBC, Barclays, Lloyds and Natwest all sold off sharply as the FTSE 100 soared

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 to the Treasury late last year by then Prime Minister Liz Truss to clean up the mess 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 it.

Hunt wanted to do everything possible to make sure nothing like this happened again on his watch.

But the reality is that when he showed up at the dispatch box at lunchtime yesterday, the Chancellor and his counterparts around the world were in the midst of a battle to avert another financial crisis.

Trouble began for Hunt on Friday night as the UK 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 tech companies and, according to Tech London Advocates founder Russ Shaw, had it been allowed to fail the industry would have been ‘decimated’.

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

The Chancellor hoped at the time that the deal would calm markets and give him a stable platform for his budget, but the situation has instead worsened as fears of contagion spread.

Yesterday morning in London, as Hunt made his way to the House of Commons, HSBC, Barclays, Lloyds and NatWest all sold off heavily as the FTSE 100 fell.

The situation was so bad that top HSBC bosses called workers from the rescued branch of SVB in the UK to assure customers that “their deposits are safe and the loans are taken care of”.

In this context, Hunt, who had big bags under his eyes, stood 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 forward-thinking companies.

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

But, as he spoke, the real problem was growing in Europe after Credit Suisse’s biggest investor said it would no longer provide financial aid to the Swiss bank.

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

BlackRock chief executive Larry Fink added fuel to the fire, telling his investors in a letter that they now face a “slow crisis with more foreclosures and closures to come”.

The founder of the £7.2trillion fund manager said SVB’s collapse was an example of the “price we are paying for decades of easy money”.

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

Investors have dumped government bonds as central bank rate hikes offer better yields elsewhere, eroding the value of the bond holdings of big banks, which use them to offset even riskier investments. This caused massive paper losses and bank stocks sold off as panic set in.

In the 1990s, the Clinton administration ran into big trouble trying to control the bond markets after heavy federal spending spooked the markets.

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

“But now I would like to come back as a bond market. You can intimidate everyone.

How Chancellor Hunt must feel the same.

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