Ros Altmann: Debt reduction plan urgently required to avoid further crises

This is what we have learnt from a dramatic few days;

QE cannot be unwound without a crash

It was never realistic to expect such huge amounts of assets to be sold back to the markets. Of course it should have been clear that gilt yields would need to rise to get back to some kind of normality, but the extreme economic shocks that have hit the global economy since 2008 have been controlled by central bank actions and policymakers have relied on QE to facilitate their other policies.

The financial crisis, caused by excess borrowing and irresponsible lending, was mitigated to avoid meltdown by the initial creation of money – what used to be called ‘money-printing’ but was given a fancy name of Quantitative Easing.

Central banks kept saying this would be temporary, but it carried on and 2013 ‘Taper tantrum’ showed Fed could not cut back. When, in 2013, the US Federal Reserve said it was planning to taper its bond-buying, the bond markets rebelled in the so-called ‘taper tantrum’, causing sharp market sell-offs and the Fed had to halt its plans.

Recent gilt yield spikes were a ‘QT tantrum’

What we have seen in the UK in the last few days is an echo of the taper tantrum, as a ‘QT (Quantitative Tightening) tantrum’. The markets rebelled just ahead of the start of the planned sale of £80billion of its bond holdings by the Bank of England.

Until sterling’s collapse, the gilt yield rises were containable.

UK pension funds were caught with collateral calls

One of the major problems for the markets was that some UK pension funds, which have hundreds of billions of pounds invested in bonds, had to sell their gilts or other assets, to meet margin calls on their gilt derivative contracts. The latest spike was too much for many of the funds to manage, or had exceeded the buffers which they were holding.

In addition, the financial firms who had issued the derivative contracts, were demanding that cash must be paid within one or two days, whereas in the past it could be one or two weeks. If the pension funds could not raise so much cash – and it is reported that a typical £1billion pension fund may have faced a sudden cash call of over £100million – they became forced sellers of gilts or other assets, adding to the pressure from international sellers.

The situation in the markets was spinning out of control

There seemed to be no investors willing or able to step in to buy gilts, because of the fears that rates would keep rising as the rout gathered pace. That is why the Bank of England, given its remit to protect financial stability, stepped in to buy. It succeeded in bringing 30 year gilt yields down to around four per cent through the day. The Bank of England has bought some time for other measures to be considered.

Government now needs to make hard choices

Public and private debt are at very high levels, as they are in many other countries, especially after the Covid and energy price interventions and the Balance of Payments deterioration since leaving the EU. Markets need to have confidence that the UK has a plan for reducing the debt, boosting growth and managing inflation over time. Government must recognise the importance of restoring confidence in UK economic management urgently, if we are to avoid an ongoing series of crises.

Baroness Ros Altmann is a British life peer and former pensions minister