Macroscope | Four lessons Britain’s self-inflicted financial crisis holds for the world
- While the mayhem in UK markets is largely attributable to domestic vulnerabilities, there are still lessons for the rest of the world
- It shows the need for steady policymaking, the danger in ‘safe’ assets, vulnerability in housing markets and a blurry line between emerging and advanced markets
By unveiling £45 billion (US$51.5 billion) of unfunded tax cuts on top of a plan to spend US$68 billion in the next six months to cap energy costs for households and businesses, Kwarteng spooked markets to such an extent that yields on UK bonds, or gilts, experienced their sharpest rise in decades.
Pension funds’ so-called liability-driven investment strategies – an obscure risk management strategy in which the funds use derivative contracts to manage their assets to ensure they can meet future liabilities – backfired spectacularly when gilt yields spiked abruptly. This forced the funds to sell large amounts of bonds to come up with the cash to meet collateral calls on their hedges, driving yields higher.
To be sure, the mayhem in UK markets was to a large extent attributable to domestic vulnerabilities that Truss has made more acute. Yet, Britain’s financial crisis – which has shattered the government’s credibility, inflicted unnecessary pain on mortgage lenders and borrowers and raised serious questions about the UK’s resilience and creditworthiness – holds lessons for the rest of the world.
