Letter points the finger at the Bank of England and its handling of so-called “liability-driven investment”, or LDI, from pension funds at the time.
Telegraph: 9th January 2024: Report on Liz Truss lawyers letter sent to Keir Starmer.
"Liz Truss has sent a cease and desist letter to Sir Keir Starmer, demanding that he stops claiming that she crashed the economy, it can be revealed.
...lawyers acting on behalf of the former prime minister argue that the statement is “false and defamatory”...
At the core of the row are the weeks after Ms Truss’s “mini-Budget” in September 2022...
The letter argues that the financial movements did not amount to an economic crash, since there was no fall in economic output or rise in unemployment – the usual signifiers of such an event.
To back up their claim, Ms Truss’s lawyers cite a report from Andrew Lilico... managing director of Europe Economics, a consultancy. Mr Lilico told "Planet Normal"...[podcast]: “There wasn’t any crash in the economy. The economy actually grew faster in the period immediately following the mini-Budget. “It’s not as though the economy was expected to go really fast and Liz Truss made it go a little bit slower than was expected. “The thing that happened immediately following the mini-Budget was that the economy performed well. So it’s just preposterous to claim that she crashed the economy. Exactly the opposite happened. The economy did better than had been expected.”...
...Leading Labour figures including Sir Keir used Ms Truss’s seven-week record in office to attack the Tories’ economic credibility during the election campaign...
...The core of Ms Truss’s argument is that the movements in the gilt and currency markets did not lead to economic output falling and therefore it cannot be claimed that she “crashed the economy”.
The letter also points the finger at the Bank of England and its handling of so-called “liability-driven investment”, or LDI, from pension funds, which left the companies unusually sensitive to movements in interest rates for gilts..."
READ FULL LAWYER LETTER BELOW
Rt Hon Sir Keir Starmer MP
Prime Minister
10 Downing Street
London
SW1A 2AA
By email and post
[email protected]
Private and Confidential
9 January 2025
Dear Sir Keir
Defamatory statements regarding Liz Truss (“our Client”)
1. We are writing in relation to statements you have made publicly in respect of our Client which have caused and will likely continue to cause serious harm to her reputation.
2. Of particular concern are the false and defamatory public statements you made about our Client in the lead-up to the UK general election from late May 2024, at a time when you knew or ought to have known that: (i) those statements were false; and (ii) the statements were likely to materially impact public opinion of our Client whilst she was standing as the parliamentary candidate for the Conservative Party in South West Norfolk.
I. The Defamatory Statements
3. The following references are to public statements you have made regarding our Client and are not exhaustive of all such statements by you which may be relevant to the general concerns raised in this letter.
4. On or about the following dates you made the following statements:
4.1. 4 June 2024 - “I wish he [Rishi Sunak] had as much to say when Liz Truss was crashing the economy.”;[1]
4.2. 4 June 2024 - “Liz Truss crashed the economy.”;[2]
4.3. 13 June 2024 – “Liz Truss crashed the economy…”;[3]
(together, the “Defamatory Statements”).
5. The Defamatory Statements have been widely publicised and quoted in the news media. We have enclosed screenshots of relevant articles where the Defamatory Statements are referred to or quoted at Annex 1. You have made a number of other similar statements and/or repeated the Defamatory Statements on various other occasions.
6. As you know, or ought to know, the Defamatory Statements are false and misleading. Their publication is not only extremely damaging but also grossly defamatory and indefensible, for the reasons set out below. Insofar as these statements have been communicated in full knowledge of their falsity, it would be hard to avoid a conclusion that they were made maliciously. As these statements are attributed to you, you are, at law, responsible for such publication.
7. As the Defamatory Statements were made in a public setting to the general public, they do not enjoy any protection or privilege.
8. Whilst our Client objects to each of the Defamatory Statements individually and all of the Defamatory Statements as a whole, her complaint relates in particular to the allegation in the Defamatory Statements that she caused the UK economy to “crash.”
9. The purpose of this letter is expressly to bring our Client’s concern to your attention and to seek an amicable basis on which you will agree to cease repetition of what is clearly a factually incorrect and defamatory statement about our client. This request is made in the context of the basic levels of civility which is due between senior politicians, and we trust that you will respond accordingly.
Similar Fact – the King’s Speech, Briefing Notes Correction – July 2024
10. You will doubtless be aware that on 17 July 2024 the Cabinet Office published briefing notes which included words similar to, though less trenchant than, the Defamatory Words complained of in this letter. In particular the briefing referred to “mistakes of Liz Truss’ ‘mini-budget’…” Our Client wrote to Mr Case at the Cabinet Office the same day pointing out that the reference to the ‘mistakes’ of the mini-budget were both untrue, and inappropriate. The offending words were immediately removed without further argument.
11. We trust that the spirit displayed by your Cabinet Secretary will be mirrored in your response to the request in this letter.
A Falsity of the Statements
12. We disagree that any market movement during the relevant period referred to in your Defamatory Statements can be classified as a “crash of the economy” in any proper sense of the meaning of those words.
13. Our client understands that by “crash of the economy” you intended to refer to events occurring shortly after the announcement by the Bank of England that it was raising its interest rate, and the concomitant movements a) in gilt yield rates and b) in British Pound/U.S. Dollar exchange rates, between late September and early/mid-October 2022. If so then you were or should have been aware when making those statements that they were false in at least two important respects:
A) Such rate movements cannot properly be described as a crash of the economy. To use such an expression is to display ignorance of basic economics and common usage of the term ‘crash’ when referred to an economy; and
B) Those rate movements were caused by the Bank of England, and in particular by its poor handling of the LDI crisis, and its regulatory failures. The Bank of England is and was independent of Government control. Thus the relevant rate changes were not ‘caused’ by our Client.
14. These facts were clear as early as May 2024, if not before. On 17 May 2024, the Bank of England published its Staff Working Paper (no. 1,073) entitled “LASH risk and interest rates” (the “Working Paper”). The Working Paper focused on what the BoE termed the “the liquidity crisis in the UK pension fund sector in October 2022.” The Working Paper concluded: “We find that institutions with larger LASH exposures sold substantially higher quantities of gilts during the LDI crisis … Gilt sales due to LASH risk exacerbated the crisis further. High LASH risk institutions significantly contributed to the yield spike in the gilt market … For comparison, 30-year gilt yields spiked by 103bps over the same period—therefore, LASH-induced trading accounts for around two thirds of the yield spike during the LDI crisis."
15. At Annex II we enclose a full report provided by Dr Andrew Lilico, a Fellow of the Institute of Economic Affairs and Managing Director of Europe Economics. Dr Lilico is an expert in the issues referred to above. His report makes abundantly clear that any relevant gilt rate and USD/£ rate movements were due to various other factors over which our Client had no control and that your contention that Ms Truss “crashed” the economy is false and unsustainable.
16. Dr Lilico’s report, establishes, in summary:
16.1. For an event to properly constitute an “economic crash,” economic output must fall by a significant amount and stay depressed for some period of time. This will typically be associated with large falls in the value of shares and bonds, widespread bankruptcies (or at least a number of bankruptcies in very major institutions) and usually widespread unemployment.
16.2. It is clear that there was no economic crash in or following the period of the Truss Administration. Economic output did not fall. It did not even decelerate relative to its previous trend or to prior expectation. Quite the reverse, GDP growth was its fastest for some considerable time in the month and quarter following the mini-Budget.
16.3. There was no rise in unemployment, which stayed at or about historic lows. There was no sustained loss of wealth. The financial market volatility of September/October 2022 had no material enduring economic impacts. Gilts yields fell back within a short period of time. The value of sterling on international currency exchanges recovered the same way. There was no sustained material impact on mortgage rates. And the Bank of England made a profit on its intervention in financial markets in September / October 2022 not a loss, so there was no enduring fiscal impact either. Similarly, neither Liz Truss nor the mini-Budget caused any form of sovereign debt crisis given that there was no associated rise in inflation expectations during the September / October 2022 market volatility.
16.4. Moreover, neither Liz Truss nor the mini-Budget played a significant causal role in the financial market volatility of September / October 2022. In fiscal terms, almost everything in the mini-Budget of 23 September 2022 had been announced in advance. In the event, the total fiscal impact of measures newly announced in the mini-Budget was no more than around £1bn to £5bn per annum — or 0.04 to 0.22 percent of GDP. This is vastly too small to be a potential candidate to explain the financial market movements of September / October 2022.
16.5. In fact, that volatility was caused by UK pension fund mismanagement of liability-driven investment Bonds (LDIs). Indeed, economists commonly now refer to the period as the “LDI crisis” (e.g. that is how the period is referred to by the IMF). A common strategy for pension funds involves matching long-term liabilities with assets of a similar duration. Beginning after 2007/2008, funds began seeking alternatives to investment in government bonds and around 60% of private sector funds began buying gilts, seeking to leverage those gilts into collateral investment.
16.6. However, circumstances developed such that interest rates rose rapidly without a corresponding rapid increase in real economy growth (starting well before Liz Truss became Prime Minister). The derivatives used by pensions funds engaged in LDI would require rapid posting of additional collateral (a process termed “rebalancing”) in response to even modest gilts market volatility (e.g. the modest volatility that is typically associated with any Budget or similar Fiscal Event). But the cumbersome nature of the specific arrangements in which pension funds were involved meant the only way they could obtain such collateral was by selling gilts. So modest falls in gilts yields would be magnified greatly into a hugely larger spike. Essentially, as interest rates normalised, driven by inflation, after an extended period of near-zero rates, the financial strategies that worked during (and were contingent upon the continuation of) the period of very low interest rates that followed the Great Recession were bound to be exposed.
16.7. Given the circumstances, the LDI crisis would have happened at some point in any event, as rates rose. Broadly similar financial disturbances occurred in other countries as rates rose — e.g. the banking crises in the US and in Switzerland of early 2023. It was acts of the BoE that influenced the fact that the effect was felt simultaneously with the mini-budget. But those rate movements cannot be described as a crash of the economy. They were merely the movement for a few weeks of bond yields and the currency exchange rate, both of which quickly recovered.
17. On the basis of the above, it is hard to understand how the Defamatory Statements could have been honestly and reasonably made at the time. However, even if they were, repetitions cannot be excused going forward, in light of the points set out in this letter.
B Damage caused by the Defamatory Statements
18. The publication of the Defamatory Statements and the repetition by you of the Defamatory Statements has caused serious harm to our Client’s reputation.
19. More generally, the Defamatory Statements are of a kind that are obviously likely to cause serious harm to our Client’s reputation, as they accuse her of significant mismanagement of budgetary policy and public funds. Your repetition of the Defamatory Statements in public settings at a critical time in the lead-up the UK general election gives rise to a strong inference that the Statements were made with the intent that they damage our Client’s reputation and/or for political purposes (irrespective of falsity).
II. Next Steps
20. The Statements are defamatory and are causing continuing damage to our Client’s reputation. Accordingly, our client requests that you immediately cease and desist from repeating the Defamatory Statements at any point, from causing them to be repeated or from otherwise re-publishing the Defamatory Statements or any part of them;
21. We sincerely hope that this matter can now be resolved and that you will refrain from causing any further damage to our Client.
Yours faithfully
Asserson Law Offices