One of Europe's biggest banks warns UK of balance of payments crisis under Liz Truss govt. Read details here

Deutsche Bank warned on Monday that the UK could be at risk of a balance of payment crisis under the new Liz Truss government, with investors worried about the UK’s ‘policy paralysis. Furthermore, the large, unfunded fiscal expansion and expected changes to the BoE’s mandate could lead to a rise in inflation expectations and fiscal dominance.

The research note published by DB’s FX analyst, Shreyas Gopal, stressed that with an uncertain global macro backdrop, rising risk premium on UK gilts, and large foreign outflows, investor confidence could be eroded leading to a balance of payments crisis wherein foreigners would refuse to finance UK’s external deficit.

This sudden stop cannot be neglected, because if the UK can no longer attract foreign capital, the sterling would need to depreciate about 15% (trade-weighted) to reduce the external deficit to its 10-year average. But with a poor economic fundamentals outlook and an extreme emerging market-style sudden drop, the sterling could require a depreciation of nearly 30%.


The newly-elected Liz Truss government is looking to avoid a recession by cutting taxes and providing fiscal support amidst rising energy costs. This, the research note states could widen the already large current account deficit.




The current fiscal situation is not new to the UK. Back in 2010, Bill Gross had famously remarked that the UK bond market was resting “on a bed of nitroglycerine”. Further back in the 1970s, there was a similar balance of payments crisis, with the UK reeling under double-digit inflation, increasing energy costs, and worker unrest.

50 years later, the UK is especially vulnerable with a weakened investment position, with the price of insuring against a UK default slightly rising, although it is still significantly below the 2008 financial crisis levels.

DB remains worried about the large and untargeted fiscal stimulus which could push the current deficit to nearly 10% of the GDP, triggering a larger risk of a sudden stop. Add to that, the “non-zero probability” of policy mistakes, and the UK could be staring down the barrel of a balance of payments crisis.