Treasury criticises Moody’s after UK credit rating is downgraded

Credit ratings agency warns hard Brexit would damage economy’s long-term health hours after Theresa May’s Florence speech

The Treasury has hit back at warnings by the credit ratings agency Moody’s that the likelihood of a hard Brexit and a squeeze on the public finances would damage the UK economy’s long-term health.

Announcing its decision just hours after Theresa May gave her speech in Florence on the government’s Brexit strategy, the ratings agency said it had cut the UK’s credit rating to Aa2 from Aa1 partly in response to the looming prospect of the UK’s access to the European Union’s single market and customs union being reduced.

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UK draws record overseas tourists after pound’s Brexit plunge

European and North American visitors lead the way in July, with spending also increasing, ONS figures show

Overseas visitors flocked to Britain in record numbers in July and spent more than ever before in response to the improved spending power offered by the low pound.

Non-UK residents made 4m visits to Britain in July, an increase of 6% from a year ago and spent £2.7bn, up 3% on July 2016, according to the Office for National Statistics.

Related: Pound slips against euro ahead of Theresa May’s Brexit speech – business live

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May tries to reboot Brexit, offers 2-year transition period

FLORENCE, Italy — Britain is prepared to abide by European Union rules and pay into the bloc’s coffers for two years after leaving the EU in March 2019, Prime Minister Theresa May said Friday in a conciliatory speech intended to revive foundering exit talks.

The proposal got a positive, if muted, reception from the EU’s chief negotiator. But it raised hackles among pro-Brexit U.K. politicians, who accused May of delaying a divorce that is sought by a majority of British voters.

May travelled to Florence, Italy — birthplace of the Renaissance — in hopes of rebooting negotiations with the EU that have stalled over issues including the price the U.K. must pay to leave and the rights of EU citizens in Britain.

May’s speech was intended to kick-start the process before talks resume next week in Brussels. But while it was strong on praise for the EU and for shared European values, the few concrete details were far from addressing Brussels’ concerns.

The EU’s chief Brexit negotiator, Michel Barnier, said the speech showed a “constructive spirit” but “must be translated into negotiating positions” to make real progress.

Standing in front of a backdrop reading “Shared History, Shared Challenges, Shared Future” in a hall at a Renaissance church, May said Britain and the EU share “a profound sense of responsibility” to ensure that their parting goes smoothly.

She urged the EU to be “creative” and forge a new economic relationship not based on any current trade model. She rejected both a free-trade deal like the one Canada has struck with the bloc and Norway-style membership in the EU’s single market.

She called instead for “an ambitious economic partnership which respects the freedoms and principles of the EU, and the wishes of the British people.”

May proposed a transition period of “around two years” after Britain leaves the EU for the two sides to work out the kinks in the final Brexit deal.

“People and businesses – both in the U.K. and in the EU – would benefit from a period to adjust to the new arrangements in a smooth and orderly way,” she said.

May also signalled willingness to pay a Brexit bill for leaving, saying Britain “will honour commitments we have made.”

She reassured EU members that they would not “need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave.” The current EU budget runs until 2020.

May did not cite a figure, and said “some of the claims made on this issue are exaggerated and unhelpful.” Reports of the amount the EU is seeking have gone as high as 100 billion euros ($120 billion).

May also called for a new security treaty between Britain and the EU, saying close co-operation is key to fighting crime, terrorism and military threats. Again, there were few details, just an acknowledgement that “there is no pre-existing model for co-operation” that fits the bill.

Britain is eager to begin hammering out future trade and security relationships, but EU officials say that can’t happen until there’s progress on three key divorce terms — the status of the border between Northern Ireland and EU member Ireland, the financial settlement and the rights of more than 4 million EU and British citizens hit by Brexit.

When Britain leaves the bloc it will end the automatic right of EU nationals to live and work in the U.K., and that has left many worried for their futures. Previous assurances by Britain that EU nationals already in the country will be able to stay have been rejected as too vague by the EU.

“We want you to stay; we value you,” May said, adding that she wanted to write any deal on citizens’ rights into British law as a guarantee.

British negotiators hope EU leaders will decide at an October meeting that “sufficient progress” has been made on the divorce terms to move talks on to future relations and trade.

Irish Foreign Minister Simon Coveney called May’s speech “a positive contribution,” while Alexander Lambsdorff, a German vice-president of the European Parliament, said “it is a positive signal that Prime Minister May is finally making concrete suggestions for the Brexit negotiations.”

But Barnier suggested more still needed to be done.

“The sooner we reach an agreement on the principles of the orderly withdrawal in the different areas — and on the conditions of a possible transition period requested by the United Kingdom — the sooner we will be ready to engage in a constructive discussion on our future relationship,” he said.

Although the speech was directly aimed at the 27 other EU nations, none of their leaders was in the audience to listen to it. May brought along members of her Cabinet, which is split between advocates of a clean-break “hard Brexit” including Foreign Secretary Boris Johnson and those like Treasury chief Philip Hammond who favour compromise to soften the economic impact of Brexit. Both Johnson and Hammond watched May’s speech from the front row, and praised it afterward.

In Britain, May’s speech drew criticism from her opponents both to the right and the left.

Former U.K. Independence Party leader Nigel Farage, a passionate euroskeptic, said it suggested Britain would leave the EU “in name only.”

Labour Party leader Jeremy Corbyn welcomed the transition period, but said that “15 months after the EU referendum the government is still no clearer about what our long-term relationship with the EU will look like.”


Jill Lawless reported from London. Lorne Cook in Brussels and David Rising in Berlin contributed to this story.

Tax on Internet ads among Europe’s proposals to plug digital tax gap

 Europe’s executive body has revealed more of its thinking on reforming digital taxation rules, issuing details of proposals it’s considering ahead of another meeting of EU ministers next week. Read More

Another financial crisis is certain. The only question is when and how

In introducing the annual Michel Camdessus Lecture this week, Christine Lagarde, managing director of the International Monetary Fund, insisted that a number of important goals had been achieved since the financial crisis nearly ten years ago. “The crisis was overcome; a deflationary spiral avoided; and — at long last — a broad-based global recovery is under way. A hat trick of sorts.”

Quite so. But have the lessons been learnt? Some, perhaps. For one, the banking system has been made safer, at least in Western economies. Yet whereas an exact repeat of the last crisis now seems quite unlikely, it would be most unwise to assume that we’ve at last got the measure of these events. In responding to them, there is a sense in which we are always doomed to fighting the last war. All financial crises admittedly have common elements, yet each will inevitably be significantly different from the last one. Like flowing water, finance finds a way around whatever obstructions may be put in place, and creating new hazards.

Today we have a relatively good understanding of the immediate causes of the 2008-09 crisis; steps have been taken to shore up the system against a replay. But as likely as not, we’ve repeated the mistakes of the Maginot Line; we’ve built the fortifications to protect ourselves from a past threat. Next time, the nemesis will come from a different direction.

A new analysis by the markets team at Deutsche Bank finds that far from getting better at preventing and managing financial crises, we’ve actually got a great deal worse; since the breakdown of the Bretton Woods fixed exchange rate regime in 1973, these events have become a lot more frequent than they were before.

People rally in the financial district against the proposed government buyout of financial firms September 25, 2008 in New York City.

Here’s a list of some of the most high profile ones – the UK secondary banking crisis (1975); the two oil price shocks of the 1970s; the UK fiscal crisis of 1976, culminating in an IMF bail-out; numerous emerging market defaults (mid-1980s); mass failures in the US savings and loans sector (late 1980s/early 1990s); various Nordic financial crises (late 1980s); the bursting of the Japanese stock and property bubbles (1990); various emerging market shocks/devaluations (1992); the Mexican tequila crisis (1994); the Asian crisis (1997); the Russian and LTCM crisis (1998); the crash (2000). Nor did it end with the Global Financial Crisis of 2008-09. This was quickly followed by the eurozone sovereign debt and banking crises.

It is almost as if financial crisis is now the world’s more natural state. The present condition of apparent calm may instead be the aberration. The Deutsche analysis takes a quite old-fashioned view of the underlying causes of this rising tide of financial instability.

Burgeoning budget deficits, ballooning debts, unbridled credit creation, ultra loose monetary policy, financial deregulation, the build up of global imbalances – all these things have been on the rise, the analysis argues, since the final break with the gold standard in the early 1970s and its replacement by a fiat currency world. For Deutsche, the coincidence is impossible to ignore. Since nothing has been done about the underlying money system, the analysis concludes, we can only expect more of the same.

There may be some truth in this assertion, yet there is also an even greater cause, overarching, as it were, the ill discipline of the modern currency system. This, in all its various forms, is globalization. I don’t mean by this simply the free movement of capital across borders, a phenomenon that has come to act like a lightning rod, such that trouble in one market quickly spreads to other economies. Rather, I mean the wider, disinflationary effects. Explosive growth in international trade and migration has had many positive consequences, raising millions in the developing world out of poverty, but has also caused downward pressure on wages and prices in advanced economies, driving interest rates to record lows in the process. Growth in credit has become a lazy substitute for growth in wages.

Each successive financial crisis, has, moreover, been met with more of the same — ever greater levels of policy stimulus. The excess is thereby never properly purged. “By continually using stimulus to deal with crises and not letting creative destruction take over,” observes Deutsche, “subsequent crises become more likely by passing the problem along to some other part of the global financial system, and usually in bigger size.”

Persistent central bank money printing since the financial crisis has puffed up asset prices to dangerously high levels, thereby almost certainly sowing the seeds for the next crisis. So hooked on the steroids have markets become, that merely stopping them, let alone unwinding them and returning monetary conditions to “normal”, might trigger a panic.

It’s impossible to know what form Britain’s next financial crisis might take, or its timing. But here is one scenario.

Governor of the Bank of England Mark Carney.

Mark Carney, Governor of the Bank of England, this week referred to Brexit as an example of “de-globalisation.” He acknowledged that many supporters of Brexit do not think of it as such, but as an opportunity to enhance trade with the rest of the world. Yet before those supposed benefits kick in, there is bound to be some diminution of trade with the EU. If globalization is disinflationary because of the impact of global competition, it follows that Brexit will temporarily at least be inflationary, in that disengaging from the EU will reduce some of these disinflationary forces. For a while, Britain will become a somewhat more closed economy. This way of thinking has helped persuade key Bank of England policymakers that some increase in interest rates may now be necessary.

In itself, the sort of Brexit-inspired deglobalization Carney talks of would be very unlikely to trigger a financial crisis. But mix it in with the hard left policies of Jeremy Corbyn’s Labour, and all the ingredients for a catastrophic loss of international confidence in the UK economy would be in place. Brexit and Corbyn together would be a peculiarly toxic combination. Fully blown balance of payments and fiscal crises, requiring recession inducing rises in interest rates, would not be long in coming.

All Labour governments are eventually destroyed by fiscal and financial crisis. With Corbyn, it would at least be swift.


UK growth will trail Italy, France and Germany next year, says OECD

Pound’s Brexit slide has pushed up inflation and dampened purchasing power, says forecast

Italy, France and Germany will grow faster than Britain next year as Brexit uncertainty continues to weigh on consumer confidence and deter much-needed business investment, according to the latest economic forecasts by the Organisation for Economic Cooperation and Development.

The UK’s GDP growth will drop from 1.6% this year to 1% next year, in line with the OECD’s previous forecast, but Italy’s national income will grow by 1.2% next year, up 0.4 percentage points from the forecast in the June.

Related: Lloyd’s of London firm moves European base to Dublin over Brexit

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Fall in migration after Brexit could push up inflation, says Carney

Bank of England governor says labour shortages could also raise wages in short term, but Brexit would have only modest impact on prices

A sharp fall in migrant workers coming to Britain as a consequence of Brexit could push up wages and cause a spike in inflation in the short term, according to the governor of the Bank of England.

Mark Carney was setting out his view on inflation days after the Bank’s rate-setting panel indicated it could raise interest rates for the first time in a decade.

Related: UK interest rates stay at 0.25% but Bank of England hints rise is looming

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What will justify an interest rate rise in November? | Richard Partington

As Bank of England hints about a hike, stimulus from the government – including removal of the pay cap – could lead it to push further ahead on rates

We’ve heard it all before. The Bank of England is putting debt-laden consumers on notice of higher borrowing costs, yet again.

But this time, just maybe, interest rates could finally be on the march from as early as November after more than 10 years without a hike. While the first rise may simply serve to reverse last year’s emergency rate cut, there are signals that the Bank may then push still further ahead.

Related: The eurozone strikes back – why Europe is booming again

Related: UK interest rate rise – what it could mean for savers and mortgage holders

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