ALEX BRUMMER: IMF’s priority should be cutting dollar down to size 


Greenback in the headlights: IMF’s top priority should be cutting the almighty dollar down to size, says ALEX BRUMMER

The retreat by Kwasi Kwarteng on the cut in the top rate of income tax turned the tide on financial markets.

Traders, strategists and even the IMF had seized upon the reduction as a symbol of fiscal ineptitude.

And without doubt, telling the Office for Budget Responsibility to take a hike was poor judgment.

Big bucks: The rush into the dollar left other G7 economies stranded as the greenback surged 

Nevertheless, the idea that Britain has somehow become more profligate than its G7 compatriots needs disputing.

No other G7 government chose to raise taxes in the face of the energy price crisis except the UK. So the biggest changes, rolling back the national insurance surcharge and corporation tax rise, just restored the status quo ante.

Joe Biden has increased some taxes but they are far outweighed by his spending splurge. In any case, rich Americans are taxed much less than their British counterparts. This is why UK executives, such as Reckitt Benckiser boss Laxman Narasimhan, chose to flee to the USA.

The reality is that the Ukraine war set off a global price shock, and the Federal Reserve led the way in raising interest rates.

The rush into the dollar left other G7 economies stranded as the greenback surged. Japan watched the yen tumble to a 35-year low and is actively talking about intervention to restore order.

The last week has seen frequent references to the Barber boom of the early 1970s but ‘Competition and Credit Control’ was a monetary not a fiscal expansion.

Moreover, the UK’s exit from the Exchange Rate Mechanism in 1992 is painted as a disaster but also sowed the seeds of inflation targeting in Britain and a glorious period of growth.

The priority next week at the IMF annual meeting and G7 should be to persuade US officials to show the foresight of the former US Treasury Secretary James Baker and seek a path, as at the Plaza in 1985, to what fund managers Amundi describe as ‘reverse currency war’. That means cutting the almighty dollar down to size.

Swiss cheese

There is precious little confidence surrounding Credit Suisse.

The last thing the global economy needs at this juncture is an implosion at a significant global bank. Memories of Lehman Brothers are still fresh even if the collapse of Vienna-based Creditanstalt in 1931 is no more than a footnote to the Great Depression.

Regulators and executives cannot dismiss a near-60 per cent decline in Credit Suisse share price this year. Short-sellers often make the right calls, as was seen in the UK in the financial crisis when the subsidence of share prices foretold the fate of among others HBOS, Bradford & Bingley and Royal Bank of Scotland.

The Swiss bank’s credit risk is at an alarmingly high level. Some analysts argue that this is not that exceptional. Companies such as General Motors are more in peril as measured by credit default swaps.

Banks are not like car companies. It is the unseen run of commercial deposits which seals the fate of banks. Across financial markets, there is a flight to safety. 

Credit Suisse’s capacity to be sucked into scandals, including the fall of hedge fund Archegos, Greensill, Mozambique tuna bonds and Bulgarian money laundering, has left its good standing full of holes.

Faced with the market challenges, chief executive Ulrich Koerner has sought to calm markets, emphasizing the bank’s strong liquidity and capital. 

All that did was increase nervousness about prospects, but he probably had no other options.

In spite of work done to end ‘too big to fail’, it is unthinkable that Credit Suisse would be allowed to tip over. Emergency funding from the Swiss National Bank or a merger with UBS are possible outcomes.

After all, the reputation of the gnomes of Zurich is at risk.

Three problem

Vodafone’s effort to buy Hutchison-owned Three has been one of the worst secrets in the City. It would create a market-leading mobile enterprise with some 27m customers, with the aim of investing heavily in 5G. Such a deal, which would hive-off Vodafone UK into a separate entity, will largely depend on competition authorities.

Until recently, squeezing four – Vodafone, BT’s EE, Virgin’s O2 and Three – into three cell phone operators was seen as a no-go area. 

It would, almost certainly, strengthen the pricing power of Vodafone. That makes for tough decisions ahead for Ofcom and the Competition and Markets Authority.

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