Markets treating UK like ‘developing country’ after Kwarteng budget, warns ex-US Treasury chief

Current turmoil ‘hallmark of situations where credibility lost’, says Larry Summers

Former US Treasury secretary Larry Summers has said that he did not expect markets to “get so bad so fast” following chancellor Kwasi Kwarteng’s “utterly irresponsible” mini-Budget.

The senior figure – who advised presidents Bill Clinton and Barack Obama – said the markets were treating Britain like a developing country where “credibility” is lost.

“I was very pessimistic about the consequences of utterly irresponsible UK policy on Friday. But I did not expect markets to get so bad so fast,” Mr Summers tweeted.

“A strong tendency for long rates to go up as the currency goes down is a hallmark of situations where credibility has been lost,” the Harvard president emeritus said.

Mr Summers added: “This happens most frequently in developing countries but happened with early Mitterrand before a U turn, in the late Carter Administration before Volcker and with Lafontaine in Germany.”

The former Treasury secretary said current events “will affect London’s viability as a global financial centre”, adding that a currency crisis “could well have global consequences”.

Liz Truss and Mr Kwarteng are contending with turmoil sparked by their tax-cutting mini-Budget, as a disastrous day for the pound saw Labour take its largest poll lead over the Tories for 20 years.

Even Gerard Lyons, the radical right-wing economist who has advised Ms Truss, admitted that axing the top rate of tax for the wealthy had “spooked” the markets – saying he was confused by the move.

“I was against those unexpected and unexplained small tax changes on Friday,” Mr Lyons told Channel 4 News. “Even though in the scale of things they were small compared to the reversal of the tax increases, they spooked the markets.”

The pound steadied in early trading on Tuesday as it recovered slightly from the record low of 1.0327 against the US dollar on Monday after traders were panicked by the government’s economic plans.

Lenders were withdrawing some of their mortgage deals on Monday as uncertainty reigned in the wake of Mr Kwarteng’s £45bn package of borrowing-fuelled tax cuts.

Mr Summers predicted that the pound “will find its way below parity with both the dollar and euro” and warned that short-term interest rates could reach 7 per cent.

Resolution Foundation director Torsten Bell has warned that some people on fixed-rate mortgages could see their interest payments “double” when they re-mortgage over the next year.

On the “turmoil” sparked by Mr Kwarteng’s mini-Budget, Mr Bell told Sky News: “The government said it believed in markets to deliver a growth strategy on Friday. On Monday the markets have said, ‘We don’t believe in the growth strategy’.”

The think tank chief added: “Announcing large, permanent, unfunded tax cuts is not a good idea. And that is what the markets are responding to … the markets are looking at and saying, ‘That’s not what serious policy-making looks like’.”

Liz Truss and Kwasi Kwarteng (AP)

Sir Charlie Bean, the Bank of England’s former deputy governor for monetary policy, said the Bank should consider an emergency meeting in light of the UK economy’s current state.

He told BBC Radio 4’s Today programme: “I think on this occasion ... I certainly would have been counselling the governor that I think this is one of the occasions where [and emergency meeting] might have made sense.”

Sir Charlie also warned: “It now costs the UK government more to borrow than Italy or Greece, who we have traditionally thought of as being not quite basket cases, but certainly weaker-performing sovereign entities.”

Bank of England governor Andrew Bailey said on Monday the monetary policy committee would make a full assessment of the impact on inflation and the fall in sterling at its next scheduled meeting in November.

And the Treasury said the chancellor would announce a “medium-term fiscal plan” to start bringing down debt levels on 23 November.

JP Morgan economist Allan Monks told Reuters that Mr Kwarteng would have to “reverse or reconsider” their strategy to stop things getting worse.

“There is still no clear sign that the source of the problem - the government’s fiscal strategy – is being reversed or reconsidered. This will need to happen before November in order to avoid a much worse outcome for the economy.”

Mr Kwarteng is meeting with banking bosses and investment chiefs – including Aviva, Legal and General, Royal London, BlackRock, Fidelity, and JP Morgan – to discuss a package of deregulation on Tuesday morning.

The chancellor will meet with pension funds, insurers and asset managers to discuss what is being billed as a Big Bang 2.0 – a reference to Margaret Thatcher’s 1986 policies which kicked off a massive change in the City.

Germany’s finance minister Christian Lindner has questioned the “experimental” economic plan. “In the UK, a major experiment is starting as the state simultaneously puts its foot on the gas while the central bank steps on the brakes,” he told an event last night, according to Bloomberg.

Shadow health secretary Wes Streeting said on Tuesday that the “cavalry is coming” as the latest YouGov poll shows Labour ahead 45 per cent top 28 per cent.

He added: “We’re got serious people, with a serious plan that would make an enormous difference to families right across the country and to businesses, who are the backbone of our economy and will be the bedrock of economic growth.”