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Liz Truss in the end?England just barely missed the financial crash
Great Britain’s Prime Minister tore the financial center of London into a hole with massive tax cuts. The central bank pulled the emergency brake, thereby exacerbating the crisis.
The conservative politician and her Finance Minister Kwasi Kwarteng want to cut taxes in the country at any price – without any counter-financing. Experts are appalled.
REUTERS
The markets lost confidence and the pound plummeted.
REUTERS
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The new British Prime Minister wants to lower taxes at all costs.
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She does not say how she intends to finance it.
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According to experts, she almost plunged the world into the next financial crisis.
British Prime Minister Liz Truss has been in office less than four weeks, but the count is already heavy. With massive £45 billion in tax cuts and a freeze on energy prices without any funding to match, it got off to a shattering false start, splitting its own Conservative Party and throwing financial markets into chaos.
The party conference over the weekend is likely to be uncomfortable for them. The “Sunday Times” quoted a member of her party as saying that Truss would be gone by Christmas – it just wouldn’t work earlier because the group didn’t know who to replace her. The Labor Party has already taken the lead in polls.
“How not to run a country” was the headline in the London business magazine “The Economist”. The 47-year-old politician, nicknamed the “human hand grenade”, put a strain on the British pound with the radical tax reform, the rate was now at 1.03 francs. Investors demanded greater collateral for UK government bonds, driving up bond interest rates.
Crash like 2008?
On Wednesday, the British central bank pulled the emergency brake and pumped 65 billion pounds of new money into the financial system by buying government bonds. Otherwise, two UK pension funds that have invested £1 trillion in long-dated UK bonds would have been threatened. According to some experts, there would then have been a risk of a crash on a scale similar to that of the 2008 financial crisis.
According to Matthias Geissbühler, Head of Investments at Raiffeisen Switzerland, it is no longer possible to say whether it really would have been that bad. “If a larger pension fund had collapsed, the pension assets of many people in Great Britain would have been lost and that would have meant an absolute disaster for those affected,” says Geissbühler.
Economic crisis in Great Britain worsens
The danger has been averted. But the central bank actually wanted to combat inflation in the country, which was almost ten percent in August, by raising interest rates. According to Geissbühler, she did the opposite with the purchase of the government bonds, but was forced to do so: “It’s an ugly situation. The UK is failing to bring inflation under control and is further exacerbating the country’s economic crisis.”
The effects on other European countries such as Switzerland are also small thanks to Brexit. “Foreign trade with Great Britain has declined since then, otherwise the consequences would be felt much more severely,” says Geissbühler. However, certain industries such as the automotive sector are now likely to experience a slump in exports to the country. For some EU countries such as Germany, which also has high inflation, this is a threat (see box).
Germany is also threatened with a crisis
The German government announced on Thursday a 200 billion package to combat the energy crisis, including a price cap. But that eliminates the incentive to save, criticizes Matthias Geissbühler from Raiffeisen Switzerland: “The government wants to calm the population down, but it only postpones the problem.” This was also shown by the petrol price cap and the 9-euro ticket in the summer, which caused inflation to drop briefly, but shot up all the more strongly in September to ten percent and thus to the highest level in 70 years. Ultimately, Germany will have to finance the 200 billion at some point, which will be a painful process for the population. According to Geissbühler, Germany is threatened with a recession next year, even if the country comes through the energy crisis in winter relatively unscathed.
