London Daily

Focus on the big picture.
Thursday, Sep 24, 2026

Will the UK financial chaos spark a wider meltdown?

Will the UK financial chaos spark a wider meltdown?

The recent chaos on the UK financial markets has generated waves of stress and selling by investors far beyond the UK.

As the sell-offs collide with high inflation, rising interest rates and the war in Ukraine, they have raised fears the turmoil in the UK could set off a wider crisis.

Many analysts have said they believe the fallout is likely to be limited, especially amid signs that the government is reconsidering some of its plans.

Chancellor Kwasi Kwarteng was sacked on Friday, and the government has dropped parts of the package of tax cuts that initially sparked the market turmoil.

But the episode has highlighted the financial risks of the current moment.

"Markets are fragile. We have seen vulnerability that's been building over the last decade-plus," Fabio Natalucci, a deputy director at the International Monetary Fund (IMF), said earlier this week, describing the UK episode as a "warning shot".

"That fragility makes the financial risk much more elevated."


How did this start?


Borrowing costs in the UK shot up last month, triggered by Mr Kwarteng's announcement of £45bn of tax cuts in his mini-budget, which the government said would help reignite economic growth.

But he did not say how he would pay for them, which alarmed investors already worried about the UK's dim economic prospects. They swiftly sold off their holdings of UK government debt, also called bonds or gilts.


Why does this matter?


The sell-off in UK government bonds prompted a dramatic change in their value.

Prices dropped and investors demanded a higher interest rate for holding a riskier investment, creating major volatility in what is usually considered a stable, safe investment.

That kind of swing can have big ripple effects, as investment firms adjust their holdings to cover losses and the increased risk.

UK Prime Minister Liz Truss has walked back part of the government's plan but analysts say more is needed to calm markets


In the UK, some of the first cracks appeared at pension funds, giant investment firms that manage people's retirement savings and typically put a big chunk towards investments like government debt.

Facing losses that were at risk of spiralling, pension funds pleaded for help from the Bank of England, which agreed to step in and buy government debt as an emergency intervention. In fact, the Bank of England ended up stepping in three times.

The sudden rise in borrowing costs also meant chaos for the UK housing market, where mortgage rates on typical two and five-year fixed deals have jumped to more than 6% for the first time in over a decade.

Analysts expect the rise in mortgage rates to spark a fall in property prices, meaning that another investment often seen as pretty safe is suffering a major, rapid change in value.


How has this affected other countries?


Interest rates on some US and European government debt have also jumped alongside the UK's.

And as UK firms respond to the changing market, they have dumped some of their riskier assets, creating knock-on effects.

For example, selling of collateralised loan obligations (CLOs), a term for bundles of corporate debt, jumped in the weeks after the UK announcement, the Wall Street Journal reported. That is a part of the market that some already saw as full of financial risks.

"There is a general sense of unease in financial markets because we never know where the landmines are buried," said economist Barry Eichengreen, professor at the University of California, Berkeley.

"People are worried about which insurance companies and which pension funds and which bond markets are in a delicate state at the moment and we never know for sure.

"When bad things happen anywhere, people pause and global risk aversion rises."


So will this become a global financial crisis?


IMF officials said last week that global financial instability was now verging on crisis levels, as investors pull back.

"We are certainly at a stressed moment," said Tobias Adrian, financial counsellor at the IMF warned, noting that indicators of strain, like demand for dollars, have surged. "The only times when things were worse was in times of acute crisis."

Analysts say the pound could fall below the dollar


The organisation did not forecast a major financial blow-up, noting that the traditional banking system in major economies like the US and UK has become more resilient in response to regulations imposed after the 2008 financial crisis.

But there are more vulnerabilities in emerging markets, where the Fund estimates that 29% of banks are at risk of financial problems in the event of a sudden, serious downturn.

In the US and UK, officials are also worried about unknown problems in the large "shadow banking" system - where investors develop and trade debt products largely outside the view of regulators.

As central banks around the world raise interest rates, those piles of debt may come under strain.

"When we look at the safety and soundness of the financial system... we should look at not only the banks but also the non-bank lenders," Ben Bernanke, who led the US central bank during the 2008 financial crisis, warned on Monday.

He was speaking at a press conference that was supposed to be about his winning the Nobel prize in economics, but was dominated by questions about the current economic risks.

For now, the turmoil stemming from the UK appears to be a "bump in the road," Jamie Dimon, head of US bank colossus JP Morgan said Friday.

But he warned: "There are going to be other surprises".

Newsletter

Related Articles

0:00
0:00
Close
Royal Navy Commandos Complete Maritime Operations Training With US Navy SEALs
Vistry Profit Warning Adds to Concerns Over UK Housebuilding Conditions
UK Commits £343 Million to Major Expansion of Community Mental Health Services
Five Eyes Partners Back UK-Led Campaign Against Global Fraud Networks
UK Businesses Gain Full Access to £13 Trillion CPTPP Trading Bloc
UK Allocates Nearly £10 Billion for Council, Social and Affordable Housing
Chancellor John Healey Unveils Deregulation Drive to Accelerate UK Investment and Growth
Prime Minister Andy Burnham Sets Out Post-Brexit Foreign Policy Vision at United Nations
UK Reassesses Chagos Arrangements as Burnham Seeks New Path on Diego Garcia
Key Trends to Watch
Government’s “Buy British” Procurement Push Targets More Domestic Jobs and Industrial Capacity
Scotland Launches Four-Year Flood Resilience Programme With New Community Funding
Low-Income Renters Face Record Gap Between Housing Support and Private Rents
UK and US Test Torpedo Launch From British Undersea Drone in Defence Technology Milestone
Britain Pushes Artificial Intelligence Security Onto United Nations Security Council Agenda
Treasury Committee Defends Office for Budget Responsibility Independence Amid Fiscal Pressure
Scotland Records Eleven Per Cent Rise in Drug-Use Deaths as Cocaine and Nitazenes Drive Concern
Welsh Government Sets Four-Year Programme Around Health, Living Costs, Jobs and Housing
Study Finds Most People With High Blood Pressure in England Remain Undiagnosed
Britain Plans First National Workplace Health System to Tackle Economic Inactivity
England to Introduce Vocational GCSEs in Major Secondary Education Reform
UK Elevates Climate and Nature Risks to National Security Priority
Andy Burnham and Donald Trump Put Trade at Centre of First Major Bilateral Meeting
Andy Burnham and Ursula von der Leyen Push Ahead With Closer UK-European Union Economic Ties
UK Government Borrowing Jumps to Eighteen Point Three Billion Pounds Ahead of October Budget
Piddington Residents Back Symbolic Independence Vote Over Asylum Accommodation Plan
Reform UK Names Helen Jenner as New Leader in Wales
England Expands Devolution of Transport, Skills and Economic Development Powers
Liberal Democrats Call for Temporary Fuel Duty Cut to Ease Cost-of-Living Pressure
UK Farmers Warn Drought Has Caused Crop Failures and Reduced Harvests
UK Fixed Mortgage Rates Approach 6% as Lenders Raise Borrowing Costs
YouGov Poll Puts Labour at 23% With Conservatives and Reform UK on 21%
Badenoch Presses Burnham to Increase Defence Spending and Cut Welfare Costs
UK Military Figures Warn of Growing Threats to Undersea Infrastructure and National Readiness
BP Moves Ahead With Sale of UK North Sea Oil and Gas Business
UK and ASEAN Endorse New Framework for Trade and Economic Cooperation
UK Consumer Confidence Falls to Three-Year Low as Borrowing Costs and Job Concerns Rise
UK Inflation Rises to 3.1% as Motor Fuel Costs Push Prices Higher
Bank of England Sets Multi-Year Plan to Wind Down Quantitative Easing Holdings
UK Borrowing Rises to £18.3 Billion in August Ahead of October Budget
Michelin Guide Faces Industry Questions Over Restaurant Inspection Coverage
English Woodlands Face Renewed Weather Stress From Dry Conditions and Strong Winds
Research Finds Extensive Alcohol, Gambling and Unhealthy Food Branding During 2026 World Cup
Five Charged After Newborn Baby Dies From Stab Wounds in Sheffield
BT Could Reap £2 Billion From Recycling Copper as Full-Fibre Network Expands
FCA Urges Young Adults to Trace £1.5 Billion in Unclaimed Child Trust Funds
Reform UK Names Helen Jenner as New Leader in Wales After Dan Thomas Steps Down
Resolution Foundation Calls for Broad-Based Tax Rises to Fund Higher UK Defence Spending
Ed Davey Calls for Global Treaty to Halt Development of Super-Intelligent AI
Scotland Consults on Legal Price Caps for Essential Foods
×