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Austerity Beckons As Truss Seeks to Restore Britain’s Reputation With Investors

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Eight words from Liz Truss explained how the prime minister hopes to restore Britain’s reputation for running sound public finances after sacking Kwasi Kwarteng, the chancellor she only appointed five weeks ago.

“Spending will grow less rapidly than previously planned,” she said, announcing a second partial U-turn on the disastrous September “mini” Budget that triggered chaos in the markets.

The importance of these words is difficult to exaggerate. They imply cuts to departmental budgets, reduction in capital expenditure plans and lower-than-expected non-pension welfare payments.

Paul Johnson, director of the Institute for Fiscal Studies, said Truss’s comments meant austerity was back. “[Spending] can’t increase much less quickly without actually going down.”

Although the UK public finances have many line items, the basic arithmetic for Truss and her new chancellor Jeremy Hunt is simple and brutal.

To reassure markets, the government needs to keep to its promise that public debt will decline as a share of gross domestic product in the medium term — so no later than 2027-28, the last year of the Office for Budget Responsibility’s upcoming forecasts. These will be published at the same time as the government sets out its debt reduction plan on October 31.

This commitment is significantly looser than the current fiscal rules, but financial markets will probably let that pass.

Financial Times calculations, which are similar to those from the IFS, suggest that, in 2027-28, the government would have to lower public borrowing by between £50bn and £60bn annually.

Some £18bn of the total will come from raising the corporation tax main rate to 25 per cent next April from 19 per cent today. Kwarteng had scrapped the planned increase in his fiscal statement, a decision that was reversed by Truss on Friday — the second U-turn following her decision not to abolish the top 45 per cent tax rate on earnings above £150,000 as her former chancellor had also promised.

The remainder of the money — about £40bn a year — would need to come from lower public spending, although the prime minister did leave open the possibility of reversing other tax cuts promised in the “mini’ Budget after calling the corporation tax U-turn a “downpayment”.

Torsten Bell, director of the Resolution Foundation, said that without further backtracking on other aspects of the fiscal statement the task would still be difficult. “The need to fund the remaining tax cuts and darker economic outlook — including higher debt interest costs — mean that despite today’s U-turns, Jeremy Hunt has just two weeks to decide how to fill a black hole of several tens of billions of pounds in the public finances,” he said.

To reduce the public spending totals by £40bn is far from easy, a challenge made harder by the promise of no real-terms spending cuts.

The easiest option is to just keep public spending rising in line with economy-wide inflation after the existing plans run out in 2024-25. But on the FT’s calculations, this is not enough to ensure debt is falling as a share of GDP.

In addition, the government is therefore likely to have to consider postponing some capital investment projects and allowing benefits to rise at a rate slower than inflation.

Together all three of these measures would enable the new chancellor to say that, on paper at least, the sums add up and debt is projected to be falling in the medium term.

This plan has problems, however.

First, public services are already struggling to live within the current spending limits and further cuts will increase pressures on services such as health, education and justice. The government gives no guarantees it will be able to live within the plans, especially as high inflation has already cut their real value.

Second, financial markets might doubt the credibility of promising cuts in public spending after the next election.

Bond market approval will be the ultimate test of the medium-term debt-reduction plan due at the end of the month. It still has a long way to go to make the sums coherent and credible.

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Original Post: ft.com

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Iceland Introduces ‘turkey Promise’ to Ensure Shoppers Get ‘low Price’ Meat

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Iceland has frozen the price of its festive fowl.

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Bankman-Fried Empire Includes Billions of Dollars of Illiquid Investments

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Sam Bankman-Fried’s business empire includes billions of dollars of illiquid venture capital investments, according to internal records seen by the Financial Times, underscoring the uncertain recovery facing customers of his collapsed FTX exchange.

The 30-year-old entrepreneur, once a star of the crypto industry, on Friday placed FTX international, its independent US arm, and his proprietary trading firm Alameda Research into a joint bankruptcy process in Delaware federal court.

Initial filings listed both assets and liabilities of the group at between $10bn and $50bn. FTX’s new chief executive John Ray, who was brought in to chair Enron during its liquidation, said the companies had “valuable assets” and that the bankruptcy would maximise recoveries.

The sprawling venture capital portfolio will add to the complexity of the insolvency proceedings, which itself includes more than 130 companies controlled by Bankman-Fried. FTX’s collapse is among the most dramatic failures in the crypto industry not just this year, but since the creation of bitcoin more than a decade ago.

FTX and its affiliates have not yet disclosed the exact size of their liabilities and assets, and the shortfall that likely exists. FTX’s recently departed head of institutional sales, Zane Tackett, said on Twitter on Friday that the shortfall ran into billions of dollars. FTX did not immediately respond to a request for comment.

Any gap between assets and liabilities will be influenced by the value that can be recovered from almost $5.4bn that FTX and Alameda invested in almost 500 crypto companies and venture capital funds, according to the records seen by the FT.

The largest of those investments is $1.15bn that Alameda ploughed into crypto mining group Genesis Digital Assets between August 2021 and April 2022, the records show.

Publicly traded mining companies have sold off sharply over the past year as the crypto market has declined. The HashRate crypto mining index, which tracks such stocks, is down 75 per cent since August 2021. Genesis did not immediately respond to a request for comment.

The records also list more than $1bn invested across about 40 funds run by venture capital firms, including some that were investors in FTX such as Sequoia Capital. Those holdings include a $300mn investment by Alameda in K5 Global, the firm run by Michael Kives. The investment amounts to 30 per cent of K5’s general partnership, and $225mn of the total sits in Elon Musk’s SpaceX and Boring Company, and other unidentified businesses, according to the records.

Earlier this year, texts released during Musk’s litigation with Twitter showed Kives suggesting Bankman-Fried as a co-investor in the social media company. Musk was dismissive of the FTX founder and ultimately took money from the head of rival exchange Binance, Changpeng Zhao.

Other big bets detailed in the records include a $500mn investment in Anthropic, an artificial intelligence “safety and research company”, made by Bankman-Fried through Alameda earlier this year. Anthropic did not immediately respond to a request for comment.

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Sam Bankman-Fried’s $32bn FTX Crypto Empire Files for Bankruptcy

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FTX, the once high-flying crypto currency group, has filed for bankruptcy protection in the US, marking a stunning collapse of the $32bn empire built by the colourful 30-year-old entrepreneur Sam Bankman-Fried.

The filing in Delaware federal court on Friday included the main FTX international exchange, a US crypto marketplace, Bankman-Fried’s proprietary trading group Alameda Research and about 130 affiliated companies.

FTX’s failure came after Bankman-Fried desperately sought billions of dollars to save the exchange this week after it was unable to meet a torrent of customer withdrawals in a run prompted by concerns over its financial health and links to Alameda.

The collapse of such a prominent group, which advertised during the US Superbowl and whose shorts-wearing, charismatic founder was a leading donor to the Democratic party, has rocked the notoriously volatile crypto industry.

Bitcoin dropped 5 per cent to a fresh two-year low of $16,492 after the FTX bankruptcy was announced. Changpeng Zhao, chief executive of Binance, earlier on Friday said the fall of FTX left crypto facing a financial crisis akin to 2008 and that more businesses could fail in its wake.

Bankman-Fried, who one week ago was among the most respected figures in the sector with a $24bn personal fortune and close links with Wall Street and celebrities, resigned as FTX’s chief executive on Friday. John R Ray, a restructuring specialist who oversaw the Enron and Nortel Networks bankruptcy cases, will take the reins.

“The FTX Group has valuable assets that can only be effectively administered in an organised, joint process,” Ray said.

In just over three years, FTX had secured a $32bn valuation and had wooed a roster of blue-chip investors, including Paradigm, SoftBank, Sequoia Capital and Singapore’s Temasek. Venture capital firms Sequoia and Paradigm have in recent days marked their investment down to zero.

The sprawling business empire run by a tight-knit group of longtime associates around Bankman-Fried, many of whom lived together in a Nassau penthouse in the Bahamas, has around 100,000 creditors and $10-50bn of assets and liabilities, according to the filing.

The US Securities and Exchange Commission is investigating FTX, which includes examining the platform’s cryptocurrency lending products and the management of customer funds, according to a person familiar with the matter.

The bankruptcy filing follows a frantic week in digital asset markets. Rumours about the financial health of FTX and its trading affiliate Alameda Research culminated on Monday in a run on the exchange with insufficient readily accessible assets to meet $5bn in customer withdrawals.

After appeals to its investors and rival exchanges, FTX halted the demands on Tuesday and agreed a rescue by the world’s largest crypto bourse, Binance, led by Zhao, a one-time partner turned arch-rival of Bankman-Fried.

That deal fell through a day later after Binance said due diligence revealed insurmountable financial problems at FTX. Last-ditch efforts to find another investor to supply up to $8bn failed in recent days.

FTX Digital Markets Ltd, the group’s subsidiary in the Bahamas, where it is headquartered, is not included in the bankruptcy proceedings. The Securities Commission of The Bahamas froze the subsidiary’s assets on Thursday and appointed a provisional liquidator.

LedgerX, a regulated US futures exchange, and a subsidiary in Australia are among other units not included in the filing. The group’s Australian business has already been placed into administration while Japanese watchdogs suspended operations of FTX’s affiliate in the country.

Bankman-Fried has blamed mistaken accounting of the exchange’s liquidity and leverage for the collapse.

“I’m really sorry, again, that we ended up here,” he said following Friday’s filing. “I’m piecing together all of the details, but I was shocked to see things unravel the way they did earlier this week.”

Additional reporting by Stefania Palma in Washington

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