The UK has fired a warning shot for the rest of the world
The UK’s humiliation after bond investors rejected its mini-budget and sparked a liquidity crisis threatening the country’s pension funds holds two lessons for the rest of the global financial system. First, more markets will break down thanks to rising rates. Second, the battle everywhere between central banks fighting inflation and governments seeking to sustain economies and manage the cost of vast stocks of public debt will define finance for years to come.
On October 12, Tobias Adrian, director of the monetary and capital markets department of the IMF, presented the fund’s latest global financial stability report.
The tone was grim.
Poor liquidity even in supposedly high-quality asset markets was leading to sudden, sharp losses, Adrian told his audience, adding: “There is a risk of disorderly tightening in financial conditions that may interact with pre-existing vulnerabilities.”
Those vulnerabilities have been building up for decades – an excess of debt, weak economic growth, spill-over effects between seemingly disconnected markets and the exposure of the world's banking system to a growing and weakly regulated non-bank financial sector where liquidity mismatches abound and high leverage is hidden.