After the Rose Garden 5: Capital Markets
This post risks an ungracious tone, a few days after learning that Trump’s first trade deal is with the UK. The thin five-page document is not legally binding, as much an agreement to agree as anything else and far from the ambition of our Manifesto to Lord Mandelson. What follows is all about turning Trump’s minuses into a plus: taking the uncertainty he promotes as an occasion to further the UK’s capital markets by hosting defence funds; boosting London for emerging market bonds; and serving as a haven for US flight capital.
Defence borrowing
Trump has put the wind up Europe, now scrambling to find money for defence. What with ’08, Covid and several generations of welfare entitlements, the continent is tapped out. Its leaders flinch from hard choices, so extra spend can only come from borrowings. The EU itself has proposed borrowings of some €150bn. If efficiency were all that mattered, this would happen in London which has deeper expertise and liquidity than elsewhere in Europe. Such arrangements would, however, provoke residual post-Brexit blow-back and the ambition of European financial centres to get in on the act. Neither would affect the multilateral Defence Security and Resilience Bank, whose promoters envisage up to £100bn of capital according to formulas yet to be agreed. Nor the third idea in the air, an unquantified proposal by the UK for an intergovernmental vehicle outside the structures of the EU, to purchase military equipment, subscribed by investors comfortable with the sector.
However urgent the need, Europe’s finances grind but slowly. Even so, something of the sort is in prospect: developing such capacity in London cannot but help Britain’s option of “liberal leadership” of intensified relations between Europe and trading nations elsewhere, provided the EU can get off its high horse. It’s good that the country is already putting its best foot forward; let’s not break stride.
Emerging market bonds
Since ‘08, bonds have come to be the thing. The OECD reports that at the end of 2023, around $100tn were in issue, just under half by non-OECD members - emerging markets. Some come under local law, but most use “international law”, that is the courts of New York State or England and Wales as creditors’ confidence in these jurisdictions makes for lower interest rates. Other things being equal, Trump’s chaos will encourage emerging market borrowers to specify the law of England and Wales. The UK authorities should discreetly push this along, as it adds to London’s attractions for issuing, underwriting and trading every kind of bond. In 2024, the total bond revenues of the top ten banks were $40bn. Moving just a quarter of that to London would bring in enough new taxes for eight new provincial hospitals.
As global capital imbalances alter over the medium term, US Government borrowings, “Treasuries”, may lose their place as the default sovereign instrument, creating further opportunity for London’s bankers. All of this sits equally well with liberal leadership or Singapore on Thames.
Flight capital
Serious money flees confiscation, undue taxation and arbitrary regulation. Of late, it has been dodgy oligarchs who have bolted the first, but anyone with good sense shuns all three. Trump cultivates unpredictability, challenging America’s reputation for scrupulous dealings. We may expect an incalculable flow of greenbacks seeking sanctuary. London is well placed as a safe haven, with a strong record of treating overseas parties fairly. First, the authorities will have to reverse their post 9-11 policies of leaning over backwards to co-operate with the IRS - the American taxman. Well-judged policies will attract US institutions, corporates or private persons seeking to avoid disruption. Specifics include a judicial presumption of confidentiality in selected holdings or transactions; special tax treatment likewise; and (probably a bridge too far, even for policymakers of the most daring disposition) introducing numbered accounts for foreign beneficiaries, with title transmitted by power of attorney along classic Swiss lines.
We need to pull off a balancing act, not least to keep up the developments envisaged by Thursday’s trade deal. The US also uses its financial muscle to coerce its antagonists with direct and secondary sanctions, with the UK and other liberal trading nations bound to share American objectives from time to time. The standalone stance of Singapore on Thames would permit greater flexibility. We expand on this in our next post on foreign policy.
Conclusion
These three themes apply differently to the alternatives of liberal leadership or Singapore on Thames, with European defence borrowing likely to come up against EU ambitions to regulate and repatriate. The EU is also likely to be sniffy about arrangements to encourage US flight capital, as Europe itself has long been a source of jumpy money. Bond issuance poses no such problems as no European jurisdiction competes with New York State or England and Wales.
Next post – foreign policy
Miles Saltiel