Aurelia Butler

Liz Truss has vowed Britain will “ride out the storm”, as the new UK prime minister began confronting an economic crisis with a massive energy bailout for families and businesses that could cost more than £150bn.Truss dodged torrential rain outside Downing Street to tell the country that she would create an “aspiration nation”, adding: “As strong as the storm may be, I know that the British people are stronger.”Within minutes of entering Number 10, Truss set about forming a cabinet and finalising an energy relief package that will set the tone for her premiership and sharply increase government borrowing. Truss’s allies suggested the household package would cost £90bn, with an estimated £40bn-£60bn for the business element, which is still being finalised, over two years.The estimated scale of the package is bigger than any single Covid-19 support scheme. Ahmed Farman, an analyst at Jefferies, said it would amount to the “largest welfare programme in the UK’s recent history”. The package of support was being drawn up by Kwasi Kwarteng, who was appointed chancellor on Tuesday night as Truss began forming her new cabinet. James Cleverly was named foreign secretary and Suella Braverman home secretary. It is the first time in British history that none of the top four “great offices of state” are held by white men. Thérèse Coffey, a key ally, becomes health secretary and deputy prime minister.

Truss spent her first hours in Downing Street sacking many prominent supporters of leadership rival Rishi Sunak from the cabinet, including deputy prime minister Dominic Raab, transport secretary Grant Shapps and environment secretary George Eustice. Truss appointed a raft of like-minded rightwing ministers to her cabinet, but ironically her government’s first major act will be to oversee a massive debt-funded intervention in the energy market.Truss intends to cap household energy bills at about £2,500, compared with the current cap of £1,971, with the estimated cost of about £90bn funded through government borrowing. Consumers will also receive a previously announced one-off payment of £400 to help offset rises.The cap had previously been scheduled to leap to £3,549 next month, with a projected increase to above £6,000 in 2023. Sustained high gas prices could easily see taxpayer exposure exceed £200bn.Truss will link the energy package to long-term market reforms and a commitment to increase oil and gas production, along with fracking for shale gas if local communities approve.The costs to taxpayers of freezing energy prices will be met by government borrowing and will depend on the level of wholesale gas prices, the use of energy and the level of any price freeze.Kwasi Kwarteng is headed for No 11 Downing Street as the new chancellor © REUTERSOne person who has held detailed discussions with the Truss camp in recent weeks said the new prime minister wants one big intervention that will protect households for at least 18 months. “Their objectives are to do it once and do it big,” the person said.Craig Beaumont of the Federation of Small Businesses, said Truss’s plans “looked very promising”, adding: “The scale and reach of this help is going to be absolutely crucial to save hundreds of thousands of small businesses this winter.”Earlier Truss met the Queen at Balmoral, as the transfer of power from Boris Johnson to Britain’s third female prime minister took place against the backdrop of the Scottish highlands.Truss, speaking in front of supporters in Downing Street, said she had three priorities, including dealing with the energy crisis, which she said was “caused by Putin’s war” in Ukraine.Truss also vowed to pursue growth-related policies, including cuts to personal and business taxes, and to address the crisis in the NHS.

Kwarteng is expected to hold a mini-Budget later this month to push through tax cuts, including a £30bn reversal of national insurance and corporation tax rises, that the new PM claims will boost growth.Sterling has fallen 8 per cent against the dollar over the past three months, reflecting concerns about the UK economy and broad strength in the US currency.UK sovereign bonds have also sustained intense selling, with the government’s 10-year borrowing costs in the gilt market surging to 3.1 per cent on Tuesday from about 1 per cent at the start of the year.Earlier in the day, Johnson made a defiant farewell speech outside Number 10. He did not apologise for the series of scandals, including partygate, that led to his downfall. The outgoing prime minister also dropped a classical hint that he might yet make a comeback.“Like Cincinnatus, I am returning to my plough and will be offering this government nothing but the most fervent support,” he said. Historians pointed out that Cincinnatus later returned to Rome as ruler.Reporting by George Parker, Nathalie Thomas, Jim Pickard, Sebastian Payne, Chris Giles and Jasmine Cameron-Chileshe More

Zambia is asking for more than $8bn of relief on its debts to Chinese lenders, private bondholders and other creditors, according to an IMF analysis, in a restructuring widely seen as a test of Beijing’s willingness to absorb losses on loans it has extended to developing countries.After securing an IMF bailout last week, Zambia plans to reduce its debt payments by $8.4bn over the next three years, according to a fund analysis that was published on Tuesday. Further debt adjustment is likely later on, it added.President Hakainde Hichilema’s government secured the $1.3bn IMF loan, two years after Zambia became the first African country to default in the pandemic following what the fund called “years of fiscal profligacy”. The country’s debts quadrupled between 2014 and 2019 amid a surge in infrastructure borrowing under Edgar Lungu, the former president, who lost elections last year to Hichilema.With Lusaka owing about $6bn of its $17bn in external debt to Chinese lenders, China is its biggest creditor. Beijing’s handling of Zambia’s bailout is seen as a litmus test for how it deals with defaults by other developing economies, such as Sri Lanka and Bangladesh. In recent decades, China has surpassed the World Bank as the biggest foreign creditor to less developed countries. Loans are expected to sour as growth slows and global interest rates rise. The IMF offered the bailout after bilateral creditors, including Chinese lenders, agreed in principle to debt relief. But Zambia must now negotiate the details of how to restructure those loans, which include $3bn of dollar eurobonds.Zambia must cut down the amount that it spends on servicing debts from nearly two-thirds of revenues to about 14 per cent in 2025, and it should maintain this ratio for most of the next decade, the IMF said. “This would imply some additional cash debt relief [on top of the $8bn] will be needed over 2026-31,” the fund added.The “initial read is no big surprise”, said Kevin Daly, investment director at Abrdn and a member of a committee representing Zambian bondholders, though he added that he had expected a larger adjustment over a shorter time horizon. Lusaka hopes to finish talks with official lenders by the end of the year and will then start talks with private creditors. Zambia will ask creditors to agree to either outright writedowns of debt or to accept an extension of the term of their loan repayments. Analysts have said that Beijing is likely to favour lengthening the time it takes to repay the debts instead of taking a more visible haircut. Bondholders, who would prefer to take haircuts, have expressed concerns that they will have to sign up to the terms favoured by China.Chinese banks and other institutions extended loans to Zambia to build airports, roads and other projects that the country struggled to repay as the economy slowed and corruption mounted under Lungu. In addition to the debt relief, Zambia is bracing for what the IMF called “a large, upfront, and sustained fiscal consolidation” to bring public finances under control. Hichilema’s government has agreed to eliminate fuel subsidies and to cut agricultural subsidies. It has pledged to protect social spending. Zambia has also cancelled $2bn of mostly Chinese project loans that were in the pipeline and yet to be disbursed. Under the terms of the bailout, the IMF expects Lusaka to limit new external loans to those from concessional creditors, such as multilateral lenders, over the next few years. More

“Europe will be forged in crisis and will be the sum of the solutions adopted for those crises.” These words from the memoirs of Jean Monnet, one of the architects of European integration, echo today, as Russia closes its main gas pipeline. This is surely now a crisis. Whether Monnet’s optimistic perspective prevails, we do not know. But Vladimir Putin has assaulted the principles on which postwar Europe was built. He simply has to be resisted.Energy is a vital front in his war. It will be costly to win this battle. Yet Europe can and must free itself from Russia’s chokehold. This is not to underestimate the challenge. Capital Economics argues that at today’s prices the worsening of the terms of trade would amount to as much as 5.3 per cent of Italy’s gross domestic product over a year and 3.3 per cent of Germany’s. These losses are bigger than either of the two oil shocks of the 1970s. Moreover, this ignores the disruption to industrial activity and the impact of soaring energy prices on poorer households.It is inevitable, too, that sharply rising energy prices will lead to high inflation. The experience of the 1970s indicates that the best response is to keep inflation firmly under control, as the Bundesbank then did, rather than allow desperate attempts to prevent the inevitable reductions in real incomes to turn into a continuing wage-price spiral. Yet this combination of large losses in real incomes with less than fully accommodative monetary policy means that a recession is inevitable.Difficult though the future looks, there is also hope. As Chris Giles has written: “There is virtually no way to escape a Europe-wide recession, but it need be neither deep nor prolonged.” The likelihood of a recession has probably risen further since then. But work by IMF staff shows that substantial adjustment is feasible, even in the short run. In the long run, Europe can dispense with Russian gas. Putin will lose if Europe can only hold on.A recent paper from the IMF points to the potential role of the global liquefied natural gas market in cushioning the shock to Europe. European integration within global LNG markets is imperfect, but substantial.The paper concludes that a Russian shut-off would lead to a decline in EU gross national expenditure of only about 0.4 per cent a year after the shock, once one takes the global LNG market into account. Without the latter, the decline would be between 1.4 and 2.5 per cent. But the former, while far better for Europe, would also mean higher prices elsewhere, especially in Asia. The estimated fall of 0.4 per cent also ignores demand-side effects and assumes full integration of global markets. For these and other reasons, the actual impact will surely be far greater.

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Another IMF paper suggests that, with uncertainty added, Germany’s GDP could be 1.5 per cent below baseline in 2022, 2.7 per cent in 2023 and 0.4 per cent in 2024. IMF work on individual EU countries also concludes that Germany would not be the worst hit member state. Italy is still more vulnerable. But the worst hit are going to be Hungary, the Slovak Republic and Czechia.The big lesson of the oil shocks of the 1970s was that by the mid-1980s there was a global glut. Market forces will surely deliver the same outcome in time. The short-term impact will also be manageable. The needed actions are to cushion the shock on the vulnerable and encourage needed adjustments, which might include emergency reopening of gasfields.

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Ursula von der Leyen, European Commission president, has asserted that the aim of policy should now be to reduce peak electricity demand, cap the price on pipeline gas, help vulnerable consumers and businesses with windfall revenue from the energy sector, and assist electricity producers facing liquidity challenges caused by market volatility. All this is sensible, so far as it goes.A crucial aspect of this crisis is that, like Covid, but unlike the financial crisis, almost all European countries are adversely affected, with Norway the big exception. In this case, above all, Germany is among the most vulnerable. This means that the shock, and so also the response, are in common: it is a shared predicament. But it is also true that individual members not only face challenges that differ in severity, but also possess substantially different fiscal capacity. If the eurozone is to get through this successfully, the question of sharing fiscal resources will again arise. It will ultimately be unsustainable to expect the European Central Bank to be the main fiscal backstop in such a crisis. Yet if weaker countries were to be abandoned, the political consequences would be dire.At least two further big issues arise. The narrower one is the role of the UK under its new prime minister, Liz Truss. She has an immediate choice: to mend the country’s fences with its European allies in response to the shared threat of Putin, or to break the treaty her predecessor made to “get Brexit done”. Europeans will rightly neither forget nor forgive if she chooses the latter in this hour of need.The second and far bigger issue is climate change. As Fatih Birol of the International Energy Agency writes, this is not a “clean energy crisis”, but the opposite. We need far more clean energy, both because of climate risks and to reduce reliance on unreliable suppliers of fossil fuels. We learnt this lesson in the 1970s. We are learning it again. The case for an energy revolution has become stronger, not weaker.How Europe responds to this crisis will shape its immediate and longer-term future. It must resist Putin’s blackmail. It must adjust, co-operate and endure. That is the heart of the [email protected] Martin Wolf with myFT and on Twitter More

The writer is a senior fellow at Brown University and global chief economist at KrollIn a world beset by multiple crises, officials may be looking past the biggest threat of all: China. The talk among central bankers at the Jackson Hole Federal Reserve Conference focused on inflation and rising interest rates. Absent was any mention that just 10 days beforehand, the People’s Bank of China did exactly the opposite, unexpectedly cutting its key interest rate.China is beset by three distressing Ds: debt, disease and drought. They belie a slowdown that is not raising sufficient alarm bells among investors and policymakers. China remains heavily integrated into the global supply chain and is a potential driver of global demand as one of the biggest markets for foreign goods and services.But economic news from China has gone from bad to worse. Manufacturing contracted in July, retail sales, industrial output and investment all slowed and youth unemployment reached nearly 20 per cent. There has been a record outflow of portfolio investments via the Stock and Bond Connects. More than 20 per cent of American multinationals are pessimistic about the five-year business outlook, more than double the percentage last year, according to a US-China Business Council poll. The median 2022 GDP forecast was recently cut to 3.5 per cent, in a country that was growing at 6 per cent two years ago.The pessimism is warranted. The first D hitting China — debt — is hardly a new phenomenon. But this time it’s concentrated in the real estate sector, which contributes roughly 20-30 per cent of GDP and accounts for 70 per cent of household wealth, 60 per cent of local government revenues and 40 per cent of bank lending, TS Lombard has calculated. Home prices have fallen for 11 consecutive months, homebuyers are boycotting mortgage payments for unbuilt properties and more than 30 real estate companies have defaulted on international debt. The policy response has been rate cuts and a fiscal stimulus focused on easing liquidity for property developers and boosting funding for infrastructure. This won’t do the trick. The money supply expanded but credit slowed sharply in July, suggesting China is stuck in a liquidity trap. Banks are being pushed to lend while demand for loans has plummeted. The fiscal measures to support infrastructure spending are unlikely to offset the property slump.The central government’s balance sheet is relatively clean, with a debt-to-GDP ratio of roughly 20 per cent. It could insist state-backed institutions lend to property developers and then bail them out, reducing the risk of cascading defaults. But that only postpones the reckoning and creates the kind of moral hazard President Xi Jinping wants to avoid.So China must drive growth via consumption, rather than through real estate or investment. This will take time and require reducing national savings by establishing a social safety net with subsidies for healthcare, housing, education and transport.At the same time, the property sector’s drag on growth is intertwined with the other two D’s: disease and drought. China continues to pursue a zero Covid policy even as exposure to the virus has expanded to all 31 mainland provinces. Morgan Stanley notes that more than 13 per cent of GDP is currently under some form of lockdown, with Shenzhen and Chengdu affected in the latest wave. That has weakened consumer and business confidence, spending and borrowing — which won’t be compensated by mildly lower interest rates.Property developments and infrastructure spending cannot be completed or boosted when a city is shut down. A lack of herd immunity due to less effective Chinese vaccines and relatively low immunisation rates among the elderly mean a much harder transition to living with Covid. On top of everything, drought has brought the Yangtze River to its lowest level since records began in 1865. Nearly 90 per cent of China’s electricity supply requires extensive water resources and blackouts are causing temporary factory closures, further disrupting domestic and global supply chains. Since six of the areas struck by drought accounted for roughly half of China’s rice output last year, the impact on food supply will be significant.The stimulus so far rests on credit expansion, delaying the inevitable adjustment and ultimately making it more painful. Covid is likely to surge this winter. Droughts may continue to reverberate through the economy as climate events become more common. All these factors point to the worrying prospect of a fourth D: China propelling us all into a new global downturn. More

No financial battle plan survives first contact with enemy economies. That is clear from western sanctions on Russia in the wake of its invasion of Ukraine. Russia this week escalated the arm’s length conflict by threatening to keep Europe’s gas switched off until it lifts restrictions. Russia’s latest broadside reflects both the strengths and weaknesses of its position.Sanctions are biting less than western politicians hoped, judging from VTB. Russia’s second-largest bank said it had returned to profit in July after record losses in the first half. Its shares, and those of larger rival Sberbank, are at six-month highs. Many pundits predicted a banking crisis. It has not materialised. The rouble is near five-year peaks. Inflation is reportedly falling.The caveat is that Russian financial data are suspect. A ban on ordinary financial reporting prevents normal analysis. Russian propaganda downplays the impact of sanctions, which evidently have the Kremlin rattled. However, Liam Peach at Capital Economics, a UK consultancy, says data from independent private providers are consistent with official figures. A GDP contraction of 12 per cent at the onset of war was first revised to a 7 per cent fall. Peach now thinks Russia’s economy might be 4 per cent smaller this year. Sanction exemptions for energy have helped hugely. So has enthusiastic purchasing by the likes of India. Lower European and US imports are buoying Russia to a record trade surplus this year.Liquidity support propped banks up through initial shocks. But these were hefty. Dmitry Tulin, the central bank’s deputy chair, estimated system-wide losses of Rbs1.5tn ($25bn) for the first half of the year, or 12 per cent of total bank capital. Total loans outstanding fell 9 per cent between April and July. Russia will now be hampered by its lack of access to high-tech capital goods of the sort produced in Germany. This is likely to disrupt energy extraction as the war of economic attrition grinds on. Russia has shown it can bear the pain of western sanctions. Western Europe must endure reprisals as robustly, or concede a historic defeat. More

HELSINKI/ZURICH (Reuters) – – Britain’s new prime minister was working on what looks set to be Europe’s biggest energy crisis support package so far as countries scramble to protect households and businesses from soaring bills and shore up struggling suppliers.Liz Truss, who took over from Boris Johnson on Tuesday, is planning to freeze household energy bills at the current level for this winter and next, paid for by government-backed loans to suppliers, the BBC reported, adding the scheme could cost 100-130 billion pounds ($116-151 billion).The government is also working on help for businesses, but this is likely to be more complex and would be reviewed more frequently, the BBC said.European governments are pushing through multibillion-euro packages to prevent utilities from collapsing and protecthouseholds amid soaring energy costs triggered mainly by the fallout from Russia’s invasion of Ukraine.Benchmark European gas prices have surged about 340% in ayear, and jumped as much as 35% on Monday after Russia’sstate-controlled Gazprom (MCX:GAZP) said it would indefinitelyextend a shutdown to the major Nord Stream 1 gas pipeline.Europe has accused Russia of weaponising energy supplies inretaliation for Western sanctions imposed on Moscow over itsinvasion of Ukraine. Russia blames those sanctions for causingthe gas supply problems, which it puts down to pipeline faults.Germany said on Sunday it would spend at least 65 billion euros on shielding customers and businesses from rocketing inflation, triggered mainly by higher energy costs.Several countries are also providing billions in support to energy distributors exposed to wild swings in prices that are forcing them to cough up huge collateral for supplies.Norwegian energy company Equinor has estimated these collateral payments, known as margin calls, amounted to at least 1.5 trillion euros ($1.5 trillion) in Europe, excluding Britain. RECESSION FEARSFinnish utility Fortum said on Tuesday it had signed a bridge financing arrangement with government investment company Solidium worth 2.35 billion euros to cover its collateral needs.A Finnish government official told Reuters the support wasin addition to the 10 billion euros of liquidity guaranteesHelsinki announced for power companies on Sunday.”The ongoing energy crisis in Europe is caused by Russia’sdecision to use energy as a weapon, and it is now also severelyaffecting Fortum and other Nordic power producers,” Fortum ChiefExecutive Markus Rauramo said in a statement.Swiss utility Axpo said it had sought and received a credit line of up to 4 billion Swiss francs ($4.1 billion) from the government to help its finances.The Swiss government has lined up a 10 billion franc safetynet for power firms, but decided to allocate the funds to Axpoeven though the legislation is still before parliament.The Financial Times also reported that Britain’s largestenergy supplier, Centrica (OTC:CPYYY), was in talks with banks tosecure billions of pounds in extra credit. Centrica declined tocomment.Many European power distributors have already collapsed andsome major generators could be at risk, hit by caps that limitthe price rises they can pass to consumers, or caught out byhedging bets.Utilities often sell power in advance to secure a certainprice, but must maintain a “minimum margin” deposit in case ofdefault before they supply the power. This has raced higher withsurging energy prices, leaving firms struggling to find cash.Soaring prices are forcing energy-hungry industries to scale back production, raising the chances of European economies plunging into recession. Aluminium Dunkerque, France’s biggest aluminium smelter, plans to reduce output by a fifth in response to mounting electricity prices, a source close to the matter told Reuters on Tuesday. The company was not immediately available to comment.The benchmark front-month Dutch gas contract was down 9.6% at 222 euros per megawatt hour at 1215 GMT, butstill up about 5% from Friday’s close.($1 = 1.0085 euros) More