IMF bailout could be on the cards for the UK

The head of macroeconomic strategies at Mizuho Securities has warned that an IMF bailout could be on the cards for the UK. In addition, a former chancellor of the exchequer warned that Britain was entering a long and severe recession, noting that it was “the worst since 1990 and possibly the worst since before that“.

Analyst raises possibility of IMF bailout of UK

Peter Chatwell, head of global macro strategies at Mizuho Securities, shared his outlook for the U.K. economy in an interview on Bloomberg Television Monday.

He explained that the new British Prime Minister, Liz Truss, has promised a fiscal policy that the British government cannot afford. He also doesn’t expect the Bank of England to be able to bring inflation closer to its 2 percent target anytime soon.

“I can think of two potential crises that this brings to mind“, said the Mizuho strategist. Noting that one of them is the European exchange rate mechanism in 1992, he opined:

And then I think about the possibility of an IMF bailout, like in 1976.

Liz Truss, a former British foreign secretary, succeeded Boris Johnson and was named the UK’s new prime minister by Queen Elizabeth on Tuesday, defeating former Chancellor of the Exchequer Ruchi Sanuk.

In September 1976, as the pound hit a record high, James Callaghan’s Labour government asked the IMF for a $3.9 billion loan, the largest amount ever requested from the IMF at that time.

Peter Chatwell is not alone in considering the possibility of an IMF bailout in the UK’s future. Deutsche Bank strategist Shreyas Gopal said on Monday that “a balance of payments financing crisis may seem extreme, but it is not unprecedented” :

The combination of aggressive fiscal spending, a severe energy shock, and a falling pound finally led the United Kingdom to resort to an IMF loan in the mid-1970s.

“Today, the UK retains some key lines of defense against a sudden shutdown, but we are concerned that the risks will nevertheless increase“, detailed the analyst.

Former Conservative Chancellor of the Exchequer Ken Clarke said Tuesday, “We are clearly likely to enter a long and possibly quite severe recession. Certainly the worst since 1990 and possibly the worst since before that“.