Liz Truss's £45bn tax cutting spree has set Britain on course for a bailout from the International Monetary Fund, a leading economist dubbed Dr Doom has warned, as fears grow that the pound could fall to parity with the dollar.
Nouriel Roubini, an economist who famously predicted the financial crisis, has warned that British investments are trading “like an emerging market” as he drew parallels with the economic chaos of the 1970s.
Mr Roubini said on Twitter that Britain is heading “back to the 1970s” and “eventually the need to go and beg for an IMF bailout” following huge tax cuts unveiled by Kwasi Kwarteng in his mini-Budget.
It came as Crispin Odey, one of Britain’s best-known hedge fund tycoons, warned that sterling risks heading to dollar parity for the first time ever after the Chancellor's announcement contributed to a market rout on Friday.
The UK turned to the IMF for a bailout in 1976 after a plunge in the pound and tax cuts by then-chancellor Anthony Barber stoked inflation. The $4bn (£3.7bn) loan was granted in return for spending cuts and higher interest rates.
Mr Roubini, who earned the nickname “Dr Doom” for his frequently gloomy forecasts, won plaudits for forecasting the coming financial crisis in a paper in 2006. But he has also made mistakes, including a prediction that Greece would fall out of the eurozone and repeated suggestions of coming global recessions that failed to materiailise.
On Twitter, he said: “Truss and her cabinet are clueless.”
The unfunded cuts have stoked worries about a flood of debt and rising inflation, dragging sterling to its lowest level in 37 years against the dollar.
Fears are growing that the pound could slip to a record low and even parity with the dollar after it plunged by more than 3pc and UK borrowing costs soared by more than ever on Friday.
Mr Odey said: “The pound has been vulnerable all year and it must be odds on that it hits parity but there is much that I like in Kwasi’s budget. It is bravely Tory.”
However, the trader – who reportedly has been shorting UK debt – said he will become “long term optimistic” on UK assets if a Labour government is avoided.
Meanwhile, Mr Bailey is expected to discuss the market chaos from the mini-Budget with the Chancellor in the coming days at their newly instated bi-weekly meetings.
The historic rout in the pound and UK debt is likely to be near the top of the agenda at the meeting after it stoked speculation of emergency action by the Bank.
Some City analysts have warned the Bank of England could be forced to intervene to shore up sterling before the next scheduled monetary policy meeting in November.
Threadneedle Street declined to comment on the speculation. Its chief economist Huw Pill could provide the first hints of how the Bank will respond on Tuesday when he appears on a panel to speak about monetary policy at a Barclays event.
Markets are now betting that the Bank will increase rates by 1 percentage point in November, the biggest rise since Black Wednesday in 1992, to head off inflationary pressures.
Investors are rushing to protect themselves against wild swings in sterling in the coming weeks as bets on the currency reaching new record lows against the dollar increase. On Friday, one-month implied volatility in the pound – a market-based gauge of investors’ expectations for swings in the currency – jumped to its highest level since the start of the pandemic.
Speculators have also been ramping up their opposition to sterling this month. New weekly trading data has revealed that investors have amassed a £3.4bn bet against sterling, though short positions predicting a plunge have eased off the September high.
Derek Halpenny, head of global markets research at MUFG, said the Chancellor’s “additional surprise income tax cuts have reinforced concerns over adding stimulus to an economy currently running the highest inflation rate across G10”.
He said: “There is certainly no ‘happy-feel’ to this fiscal give-away and appears if anything to have increased the level of uncertainties that were already very elevated.”
Confidence has drained away for the pound and UK assets in recent weeks as market worries are fuelled by a combination of recession fears and higher borrowing.
Financial contracts data suggests investors now believe the odds of sterling tumbling to a record low of $1.05 by the end of 2022 are 50/50, compared to just 3.5pc at the start of the year. The market-based probability of the pound reaching parity with the dollar within the next 12 months is 40pc.
City analysts likened the pound’s slump to that of an emerging market currency as it coincided with a rise in bond yields.
Adam Hoyes, market economist at Capital Economics, said: “This is a pattern more often associated with emerging markets, and looks like a signal that investors are becoming more concerned about the new UK government’s approach, with fiscal and monetary policy increasingly working in opposite directions.”
Jane Foley, currency strategist at Rabobank, said the pound’s slump has fuelled speculation that the Bank of England will be forced into “huge emerging market style rate hikes to prevent further sharp losses”.