The fallout from the UK government’s massive tax cuts is strong. Because of the difficulty in calculating interest rates, commercial banks stop mortgage loans. The number of large foreign investors wanting to lend money to private equity funds taking over British companies is also falling sharply. It is analyzed that disturbances in the financial market, such as a surge in UK government bond yields and a fall in the pound, have started to spread to the real economy. There is speculation that the UK crisis could happen in other countries too.
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UK mortgage market frozen
According to the Financial Times (FT) on the 1st (local time), it was calculated that 1,688 mortgage products were suspended by UK commercial banks after the UK government announced a tax cut on the 23rd of last month.
On the 26th of last month, Lloyd’s Banking Group, Britain’s largest mortgage provider, Virgin Money and Skipton Building Society withdrew their loan products. On the 27th, HSBC and others stopped making new loans. The FT said, “Added was the ‘panic prevention (withdrawal)’ march of small banks who decided they should be one step ahead of big financial firms.” Some financial institutions, such as Nationwide, have raised mortgage rates. Markets are predicting that the crisis could plunge UK house prices by up to 20%.
This confusion is due to the UK government’s tax cut policy. When the central bank of England (BOE) turned to austerity measures to control inflation, the government introduced a stimulus package, which led to a policy mismatch. The pound was devalued and government bond yields soared (treasury bond prices plunged). Global credit rating agency Standard & Poor’s (S&P) downgraded its rating outlook from ‘stable’ to ‘negative’ while maintaining the UK government bond credit rating at AA on the 30th of last month.
The reason why banks are making the decision to stop selling mortgages is because there is a high risk of insolvency in a situation where interest rates are skyrocketing like now. When house prices fall, the value of collateral falls, and defaults can come one after the other.
WSJ: “Another UK could emerge”
Shortly after the pound plunged to an all-time low (1 pound = $1.0327) due to the recent turmoil, UK Noomi Securities said, “Foreign speculative capital looking to take advantage of the weak pound and the London stock market is not’ n is valued deleted. British companies will rise. ” expressed concern. However, it has also been noted that this is just a liver fluke.
The FT reported on the same day that “institutional investors such as overseas pension funds and insurance companies are reluctant to lend money to UK private equity funds.” The biggest problem is that the real UK economy is unstable even if the ransom value of British companies is reduced thanks to the weak pound. Private equity expert Raymond James said, “Even if you acquire a company at a low price, the company will not be able to make a decent profit for now.”
The Wall Street Journal (WSJ) reported on the same day that “the turmoil in the UK over the past week could also appear in other major countries.” If this event happened because of ‘bond vigilantes’, he said, a similar situation could happen in other developed countries. The creditor gang refers to investors who sell large amounts of government bonds when there is a possibility that interest rates could rise due to the wrong policies of the authorities.
The WSJ also warned that “from a long-term perspective, government stimulus (money easing) and further stimulus for inflation could become the new normal (the new standard).” Analysts believe that the US central bank (Fed) rate hike is at the root of this crisis, and that the UK is the first victim of the Fed’s aggressive austerity measures. The WSJ said, “Even before this event, the UK was already experiencing a situation such as a weak pound and a sharp drop in bond prices.
Reporter Kim Rian knra@hankyung.com
