British crisis puts spotlight on large Irish firms earning revenues in sterling

British prime minister Liz Truss and chancellor Kwasi Kwarteng. 

Sterling fell again as the Bank of England was forced to step in and buy up British bonds amid an unfolding crisis sparked last Friday, when markets lost confidence in a mini-budget announced by the new UK government led by Liz Truss. 

The intervention by the Bank of England was designed to stop the sharp sell-off of British bonds, which are known there as gilts, which sent British yields soaring and forced mortgage lenders there to withdraw home loan products. 

Sterling which had fallen sharply on Friday and Monday in response to large unfunded tax cuts detailed by new chancellor Kwasi Kwarteng. It fell at one stage on Wednesday to $1.069 against the dollar and 89.85 pence against the euro.   

The Bank of England said it would buy bonds "on whatever scale is necessary” to soothe financial markets. Economists immediately likened the remarks to the famous speech of former European Central Bank president Mario Draghi in 2012 when he said he would do “whatever it takes” to save the euro. 

The bank described its action as time-limited and came after the IMF, in an unusual move, had criticised the British government's economic plans. 

The Bank of England said the actions "are intended to tackle a specific problem in the long-dated government bond market”.

Dermot O'Leary, chief economist at Goodbody, said that the events unfolding since Friday were serious. 

"The Bank of England is between a rock and hard place" because expectations for British interest rate rises had rocketed in recent days, Mr O'Leary said. 

"It is sign of the gravity of the situation, for a central bank to move with these emergency moves outside normal policy meetings," he said             

"The events we have seen from Friday are something I haven't seen in my career," Mr O'Leary said. 

Bloomberg reported the Bank of England decided to intervene to get ahead of a potential crisis that could have hit within hours. 

It was concerned collateral requirements such as those at pension funds, would have turned many into forced sellers of long dated gilts. 

The resumed fall in sterling has put the focus back on a number of large Irish companies that tap a significant part of their earnings from Britain.  

Sterling had fallen in the immediate aftermath of the Brexit referendum in June 2016.

A similar roster of Irish companies, including Bank of Ireland, travel companies and airlines like Ryanair and Aer Lingus-owner IAG, building merchants group Grafton, and hotels group Dalata, have come under the spotlight again.   

Bank of Ireland joined other lenders in Britain earlier this week in pulling some mortgage offerings in Britain. 

The Bank of England's intervention is effectively open-ended quantitative easing, and is in contrast to its previous rounds of buying which saw officials set a distinct target. 

Quantitative easing was one of the policies criticised by Ms Truss and her supporters during the summer’s leadership contest. 

Additional reporting Bloomberg