Can The UK Debt Crisis Happen in Australia?

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The UK’s rapid decline from a stable and robust economy to a crisis is causing panic and chaos in the global financial markets. 

The UK crisis also exposes the vulnerability of international efforts in minimising inflation, affecting all economies.

Market volatility has been surging once more since the start of the pandemic, affecting all currencies and bond markets. Countries are worried that the UK’s crisis may spill over. Ben Kumar, a senior investment strategist at Seven Investment Management LLP, states, “fear is contagious. Higher bond volatility in the UK caused by fund liquidations prompts pound sell-offs due to instability, prompting UK equity outflows and parallel selloffs worldwide.”

“The UK’s dance with disaster started when Kwasi Kwarteng, the new UK treasurer – known as the chancellor of the exchequer – presented a mini-budget to the parliament that promised a raft of unfunded spending promises and tax cuts that would be funded by increased government debt,” notes Alex Dunnin, director of research at Rainmaker Information.

Dunnin adds that within days of the mini budget’s release, the UK Treasury bond yields surged from 3% to 5% before settling at 4%. The GBP also dropped against the USD significantly, recording its lowest rate ever.

The surge in yield from the UK Treasury bond, also known as gilts, caused a severe price collapse. The collapse led to panic in the UK-defined benefit pension funds as the value of their bonds dropped tremendously, which prompted the Bank of England to step in and buy the government bonds to appease the panic.

Dunnin reports that this type of crisis would not happen in Australia. “There are almost no privately run defined benefit pension funds and of the ones still operating, they have much lower fixed interest allocations. Plus, Australia’s government leaders would never be so foolish to announce a budget that was so ineptly planned out as what the UK had just done.”

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