London Daily

Focus on the big picture.
Friday, Feb 27, 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
Bill Clinton Denies Knowing Woman in Hot Tub Photo During Closed-Door Epstein Deposition
Former U.S. President Bill Clinton Testifies on Ties to Jeffrey Epstein Before Congressional Oversight Committee
Dyson Reaches Settlement in Landmark UK Forced Labour Case
Barclays and Jefferies Shares Fall After UK Mortgage Lender Collapse Rekindles Credit Market Concerns
Play Exploring Donald Trump’s Rise to Power by ‘Lehman Trilogy’ Author to Premiere in the UK
Man Arrested After Churchill Statue Defaced in Central London
Keir Starmer Faces Political Setback as Labour Finishes Third in High-Profile By-Election
UK Assisted Dying Bill Set to Fall Short in Parliament as Regional Initiatives Gain Ground
UK Defence Ministry Clarifies Position After Reports of Imminent Helicopter Contract
Independent Left-Wing Plumber Secures Shock Victory as Greens Surge in UK By-Election
Reform UK Refers Alleged ‘Family Voting’ Incidents in By-Election to Police
United Kingdom Temporarily Withdraws Embassy Staff from Iran Amid Heightened Regional Tensions
UK Government Reaches Framework Agreement on Release of Mandelson Vetting Files
UK Police Contracts With Israeli Surveillance Firms Spark Debate Over Ethics and Oversight
United Airlines Passenger Hears Cockpit Conversations After Accessing In-Flight Audio Channel
Spain to Conduct Border Checks on Gibraltar Arrivals Under New Post-Brexit Framework
Engie Shares Jump After $14 Billion Agreement to Acquire UK Power Grid Assets
BNP Paribas Overtakes Goldman Sachs in UK Investment Banking League Tables
Geothermal Project to Power Ten Thousand Homes Marks UK Renewable Energy Milestone
UK Visa Grants Drop Nineteen Percent in 2025 as Migration Controls Tighten
Barclays and Jefferies Among Banks Exposed to Collapse of UK Mortgage Lender MFS
UK Asylum Applications Edge Down in 2025 Despite Rise in Small Boat Crossings
Jefferies Reports Significant Exposure After Collapse of UK Lender MFS
FTSE 100 Reaches Fresh Record Highs as Major Share Buybacks and Earnings Lift London Stocks
So, what's happened is, I think, government policy, not just under Labour, but under the Conservatives as well, has driven a lot of small landlords out of business.
Larry Summers, the former U.S. Treasury Secretary, is resigning from Harvard University as fallout continues over his ties to Jeffrey Epstein.
U.S. stocks ended higher on Wednesday, with the Dow gaining about six-tenths of a percent, the S&P 500 adding eight-tenths of a percent, and the tech-heavy Nasdaq climbing roughly one-and-a-quarter percent.
From fears of AI-fuelled unemployment to Big Tech's record investment, this is AI Weekly.
Apple just dropped iOS 26.4.
US Lawmakers Seek Briefing from UK Over Reported Encryption Order Directed at Apple
UK Business Secretary Calls on EU to Remove Trade Barriers Hindering Growth
Legal Pathways for Removing Prince Andrew from Britain’s Line of Succession Examined
PM Netanyahu welcome India PM Narendra Modi to Israel
Shadow Diplomacy: How Harry and Meghan’s Jordan Trip Undermines the Monarchy
Sir Jim Ratcliffe, co-owner of Manchester United, comments on immigration in the UK.
Bill Gates, the UN and the WEF are attempting to construct "a giant digital gulag for all of humanity" via digital ID, CBDCs and vaccine passport infrastructure.
Britain’s Channel Crisis: Paying Billions While the Boats Keep Coming
Downing Street’s Veteran Deception Scandal
UK HealthCare Expands ‘Food as Health’ Initiative Statewide to Tackle Chronic Illness in Kentucky
Leonardo Chief Says UK Set to Decide on New Medium Helicopter Programme
UK Slows Chagos Islands Agreement After Concerns Raised in Washington
European and UK Stock Markets Reach Fresh Highs as Banks and Miners Lead Rally
UK Government Insists Chagos Islands Negotiations Continue After Minister’s ‘Pause’ Remark
No Confirmed Deal for Engie to Acquire UK Power Networks Amid Market Speculation
UK Reaffirms Updated Entry Requirements for Travellers as of February 25, 2026
General Atlantic to sell equity stake in ByteDance, valuing the company at $550 billion
German Chancellor Friedrich Merz Secures Pledge from China for Greater Imports of Quality Goods
Lord Mandelson Condemns Arrest as Driven by ‘Baseless Suggestion’ He Would Flee Abroad
Former UK Ambassador Released on Bail Following Arrest in Epstein-Linked Investigation
UK Parliament Orders Release of Former Prince Andrew’s Government Vetting Files
×