On the afternoon of October 20th local time, after a week of political storm, British Prime Minister Elizabeth Trass walked out of the Prime Minister's residence at No. 10 Downing Street, , and made a speech in less than two minutes in front of the media camera, announcing that he would resign as the leader of the Conservative Party and the British Prime Minister, ending a 45-day "political absurd drama" and becoming the "shortest-life Prime Minister" in British history.
On October 20, 2022, London, England, British Prime Minister Tras issued a statement at No. 10 Downing Street, announcing his resignation as British Prime Minister. Photo/Visual China
Tras made a resignation decision after meeting with Sir Brady, the chairman of the 1922 committee representing the Conservative Parliamentary Cauldron that morning. Sir Brady then announced the next step: the Conservative Party will use the fastest process to elect a new leader by next Friday and immediately take over as prime minister.
Next, according to the Conservative Party Constitution, if more than two people run for election, all Conservative Party members must vote for the leader, just like the process this summer. But since this time there was only one week, it is basically certain that the Conservative Party group of parliament needs to go through discussions and compromises under the table and try their best to decide the only candidate that everyone can accept, so as to skip the election process and take over the order. At present, almost no conservative party tycoons have made public statements on whether to participate in the competition for the leader. However, according to the current forecasts of the media and bookmakers, including former Prime Minister Johnson , former Finance Minister Sunak, and Modant, the current leader of the lower house of parliament, are all strong contenders in this sudden election of party leaders.
Prime Minister
html In early September, the first major event that Tras, who had just come to power through the party election was the sudden death of Queen Elizabeth II of England. At that time, all the focus of the world was on the death of Her Majesty the Queen and the subsequent national mourning in Britain. After the Queen was buried, the national mourning ended and the cabinet resumed normal operation. At this time, the Tlass cabinet urgently fulfilled her promise during the campaign, and on September 23, the new Caishen Kwaten launched the "Mini Budget" that will be officially implemented at the beginning of the fiscal year in April next year.
This budget can be called the largest tax cut in the UK in nearly 30 years. According to the budget, the British government decided to abolish the original plan to increase the corporate tax rate from 19% to 25%, reduce the personal income tax rate by one percentage point to 19%, abolish the highest tax rate for high-income groups by 45%, reduce the national insurance contribution ratio, reduce the alcohol tax and stamp duty for home purchases, restore shopping tax refunds for international travelers, etc. According to the budget of the Trass Cabinet, the total tax cut is about 55 billion pounds per year (about 450 billion yuan).
The original intention of the Trass government is to promote the rapid economic recovery of the UK after the impact of the epidemic through large-scale tax cuts. If the tax base and tax source can be expanded, then the £55 billion tax cut can also be earned back in the long run. Moreover, tax cuts are certainly not a bad thing for most British people who are deeply trapped in inflation. However, Tras, who is still in her honeymoon period, and her cabinet, especially her wealthy Warten, far underestimated the impact of this bold attempt in the short term.
"Mini Budget" just launched, the terrible double collapse of the bond and foreign exchange markets occurred quickly. On Monday, September 26, as soon as the financial market opened, the interest rate of the UK 30-year Treasury bond soared more than 200 basis points, from 3% to nearly 6%. The exchange rate of pound and plummeted by 10%, reaching a low of 1:1.03 US dollars, almost a parity, setting a record for more than two hundred years since the birth of the two currencies, the British pound and the US dollar.
Cabinet that ignores fiscal discipline
He served as the British government, especially during the period of the Conservative government, and has always emphasized strict adherence to fiscal discipline and is very vigilant about the rise in the government's debt ratio. The Conservative Party has been strongly attacking the vicious cycle of "more debt, higher taxes" during the previous Labour Party's rule.Since the Conservative Party came to power in 2010, it took about nearly a decade for the Conservative government to work hard to fill the huge debt left by the Labor Party, putting the British finance on a low debt track.
However, under the violent impact of the new crown epidemic in 2020, the Johnson government had no choice but to relax fiscal discipline and issue large subsidies to the people to avoid the economy falling into a vicious recession. During the year of intermittent lockdown, a considerable number of British corporate employees could receive 80% of their original salary from the government without having to work at all. During the brief unblocking of summer and autumn 2020, in order to save the precarious catering service industry, the government launched a large-scale "half-price meal" campaign. In restaurants participating in this program across the country, customers only need to pay half of the bills for dine in, and the other half will be subsidized by the government. And all this expense can naturally be filled in through large debts. Fortunately, due to the nearly stagnant economic operation, the interest rate of government bonds has been at an extremely low level for more than a year, and the cost of borrowing is not high. The UK also successfully recovered last year, with its economic growth rate surpassing the G7 , G7 (G7), and returned to its pre-epidemic level in one fell swoop.
But in 2022, the conflict between Russia and Ukraine was severely escalating, causing the energy and commodity markets to soar, driving the UK's sharp rise in prices of food, gasoline and retail goods since May, and the inflation rate officially broke through 10% in the summer. At the same time, the Federal Reserve on the other side of the ocean began to make efforts to enter the rate hike cycle, and began the process of recycling global dollars with high inflation. This leaves the Bank of England with little choice but to follow the small steps to prevent the pound from collapsing like the yen.
The first thing that was affected by the repeated interest rate hikes was the middle-class family in the UK who had been carrying mortgage loans. If they had signed a floating interest rate loan contract at that time, each family would now have to pay hundreds of pounds of extra interest every month. For most people, the little money saved from tax cuts is simply not enough to fill this hole. The UK's interest rate hike has undoubtedly pushed up the cost of government borrowing. The total amount of government debt in the UK is about 2.4 trillion pounds, which is about 80% of the total amount of GDP in the UK. After several interest rate hikes, the current British government's interest cost alone is approaching 100 billion pounds per year. It can be said that the large-scale tax cut plan launched at this time is simply a water without a source.
Whenever reporters ask about the financial resources after tax cuts, Tras, who has seriously ignored financial discipline, cannot accurately give a plan for "how to repay debts". He even once put forward an answer that "debt extension, interest payment but not principal repayment" would seriously damage the UK's sovereign credit. Against this background, the financial market gave her a critical hit.
The almost collapsed pension project
As the most developed financial industry center in Europe, a large amount of public utilities funds in the UK are invested in the financial market in London to obtain a better rate of return. For example, the national and corporate pension projects of the British people are mostly "debt-driven investment" (LDI), and it is necessary to match 's long-term assets with liabilities. Although pensions themselves are not allowed to invest in leverage trading , the interest rate and inflation risks faced by pension projects within thirty or forty years are completed by holding interest rate swap contracts, and these contracts are all leveraged by .
html At the end of September, facing the fierce market shock of the debt-renewal double-killing market, traders in the London financial market could only sell their treasury bond assets by selling their and adding margin to to enter the market. However, as interest rates soared, the price of treasury bonds that were sold off was soaring. This kind of leveraged transaction generally requires margin (i.e., T+0 transactions) to be filled before the closing of the day, so traders can only sell with their eyes closed, and sell stocks after the treasury bonds are sold until all the current assets are sold. Looking at the real estate and private equity funds that cannot be quickly cashed in, the traders could only sigh and watch the hedge fund explode.Moreover, the large-scale liquidation of positions has allowed the transaction interest rates in the interest rate swap market to continue to rise, until it drags down those pension projects with better liquidity. This is the most terrifying "liquidity death spiral" in the financial market.
In just three days, interest rate swap transactions in London have failed and collapsed. Most market makers have left the market. The trading spreads for one-year interest rate swaps have increased by a hundred times, and the market has completely lost liquidity. On September 28, the Bank of England was forced to take advantage of to save the market , announcing that it would invest 65 billion pounds to buy British Treasury bonds in 13 working days, which barely stabilized the price of the Treasury bond market and prevented the investment in most pension projects from falling below the closing line. However, the yield on the UK 30-year Treasury bonds is still hovering around 4.5%, and it will not return to its original healthy level of 3% in the short term. Afterwards, some financial analysts estimated that this market shocked, about 500 billion to 600 billion pounds of funds evaporated, which was equivalent to the loss of nearly 10,000 pounds per British, while the original tax cuts that the Conservative government had planned was only 55 billion a year, accounting for only one-tenth of the losses in the past few days.
Tras failed to survive by breaking his arm
It is not difficult to see that the financial situation of the UK and the overall national economic operation of the UK are highly bound to the financial market. Unlike the United States, the British government can rely on the status of the US dollar as an international currency, increase debt through quantitative easing, and then recover a wave of US dollars by raising interest rates, pushing the exchange rate up and paying the whole world. The UK is not like the euro zone countries. The fiscal policy of how much money each country spends to borrow and how much debt each country spends is up to itself, while the monetary policy of the euro interest rate is determined by the European Central Bank. Therefore, Britain cannot learn from the United States, and let the world help pay off debts, nor can it learn from Greece , and let Germany help pay off debts. The British government always faces high constraints of fiscal discipline, otherwise, all markets related to the pound will bear high risks.
has experienced such a failed "a wave of betting against the financial market ". It can be imagined that after October, the credit of the Trass government has almost gone bankrupt. However, at the annual meeting of the Conservative Party, which was already highly tense, Tras himself tried to defend his policies, believing that the market's reaction was "over-reported" and only retracted the policy of lowering the highest tax rate to 40% for high-income groups, which was most violently attacked by populist groups. But at this time, she had missed the opportunity to reconcile with the British people who were almost angry. The poll's approval rating plummeted to less than 20%, but the non-support rating exceeded 70%. In addition, the Conservative Party's poll support rate has also declined. If the general election is held at this time, the Conservative Party will definitely suffer a historic defeat.
Soon, the Conservative MPs who did not want to be implicated by the messed-up Prime Minister took action. They began to "force the palace" of Tras, hoping that she could take on leadership responsibilities, publicly admit her mistakes and step down, and save the crisis of public opinion. Tras, who was destined to lose the chess game, chose the last move of breaking his arm to survive. On October 14, she urgently recalled Kwoten, the Minister of Finance, who was attending an international conference in New York, USA, and pulled directly from the airport to the Prime Minister's Office, and hurriedly announced the removal of Kwoten's position as Prime Minister. The disheartened Kwoten then made his reply letter to the Prime Minister, without even leaving any face, and bluntly said that he was not willing to resign, but was a forced victim. At the press conference, Tras had no choice but to answer why she and Cai Xiang discussed the budget together, but in the end she only pulled Cai Xiang out and rushed forward.
At this time, Tras, who had completely betrayed everyone, had lost almost all the support of the middle and senior officials of the Conservative Party. No senior officials with strength and ability were willing to board this destined ship to take over as the Minister of Finance. In desperation, she could only find two failed competitions for the party leader, and the former Foreign Minister Hunter, who had already passed away, filled the position of the prime minister. As we all know, Hunter is neither an ally of Trass nor does he support Trass' policies at all. After Hunter took office, he immediately announced the abolition of almost all of Tras' previous tax cuts. Tras himself did not return to London to work on Monday, but stayed in the Prime Minister's country house.Not surprisingly, the Prime Minister who hid in hiding and did not dare to accept questioning was ridiculed by almost everyone in the parliament. Home Secretary Briverman's resignation was almost a public demonstration on Wednesday. Therefore, Tras's chess game, which was made many times, finally ended in shame on Thursday after trying to regret the game many times but still failed.
Back to this failure that is destined to be written into the history of British politics. Why did Caiseng Kewoten, who was born in Eaton, has a doctorate in economic history from the University of Cambridge and has a experience in the world's top investment banks, completely misjudging the market's reactions is still a mystery to be solved. Tras' paranoidness towards right-wing economic policies and fiscal discipline was the initiator of this storm, and she completely overdrawed her own and even the Conservative Party's public support rate. The political farce starring Trass ended. In addition to the huge losses in the financial market and leaving behind a group of wage earners who lost their pensions, everything seems to have returned to the starting point of Johnson's resignation this summer.
(The author is a political commentator and a doctoral candidate in the Department of Sociology, Cambridge University)
Author: Qu Fanfu
