The UK financial system is facing a major crisis this week. What’s causing it? Short Recently, UK government-issued bonds have been getting dumped en masse, flooding the market and tanking their value.
Why is this a problem?
Two reasons.
Firstly because UK pension funds, which constitute a major source of
retirement saving for many people, are heavily invested in these bonds.
Secondly, because the government’s ability fund spending via borrowing is made possible by issuing these bonds.
Over the past couple weeks, the Bank of England has intervened in the
market and has been buying their own bonds to temporarily shore up bond
value, allowing pension funds a window to divest.
But the UK govt has announced these emergency measures will come to an end this Friday.
Why are these bonds getting dumped in the first place?
Partly it’s a loss of confidence in the UK government.
With the entirety of Europe facing an unprecedented energy crisis this
winter, investors are betting that the government will not be able pay
interest on these bonds. However, a major part that isn’t receiving as much attention is the impact of US monetary policy.
The Fed’s recent interest rate hikes are causing a huge capital flight from the UK to the US. Industry is likely to follow.
In a sense, the US is cannibalizing the UK economy.
And while this crisis may initially precipitate in the UK, it is unlikely to remain contained there. German broad market funds, for example, have lost 50% of their value since the beginning of the year.
In short, Europe is going to learn two painful economic lessons this winter:
1- a significant portion of European prosperity was built on access to cheap Russian gas.
2- capital is international, has no loyalties, and the US is throwing a welcome party.
