UK chaos: ‘Pension funds on the verge of collapse’

internationalSep 29 ’22 13:33Updated on Sep 29 ’22 2:42 PMauthor: Remy Cook

The UK’s financial situation is spiraling out of control. The new government has introduced an economic plan that can be said in advance that “will not do well,” says economist Edin Mujagi, in the BNR Macro podcast with Boot and Mujagi. “There is a mess there.”

Prime Minister Liz Truss is dealing with the UK's financial chaos, less than three weeks after her appointment.  Fiscal policy causes a lot of turmoil.
Prime Minister Liz Truss is dealing with the UK’s financial chaos, less than three weeks after her appointment. Fiscal policy causes a lot of turmoil. (National Ports Agency / Agence France-Presse)

Dissatisfaction among Britons is mainly due to tax adjustments. “These are only being reduced for a very small group, you can increase the already high national debt even more in the coming months, you name it,” Mujagic says. And that doesn’t appeal to investors on the other side of the channel: “They wonder what the hell they’re doing there, and then they act like they’re doing now.”

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Interest rates are rising staggeringly, just as the value of the pound is staggeringly falling. Mojacic says the conditions you usually encounter only in countries far from Europe.

difficult relationship

The new British government and its formulated plans led to a difficult relationship with the Bank of England, the central bank there. However, the bank has nonetheless quelled the sharp rise in interest rates. And they had them, Mojagic continues. The reason for this, says the bank itself, is terrifying. They say financial stability is at stake.

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More specifically, many of the UK’s pension funds could have collapsed. “They work with a lot of derivatives,” Mujagic explains. If you work with that, it often applies to pension funds where if interest rates go down, the fund receives money. If interest rates are rising slowly but surely, you really don’t have to worry. But if interest rates skyrocket in the short term, you as a pension fund have to deposit additional collateral. This is money they don’t have, so they will sell their own bonds. Then you get a treadmill.

Downing Street

However, the government in London does not seem to care about the problem. “If I can believe the reports from London, the government thinks nothing is wrong,” Mujagic continues. And insofar as something happens, according to the new government, it has nothing to do with the budget they presented last week. According to Mujagic, this attitude is adding additional fuel to the fire in the markets, “because investors are already angry with the policy. Now they are being told that it is not the fault of the government, but of the markets themselves.

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It also ensures that trust does not return quickly, which is essential, according to Mujagic, to structurally solve problems. So he thinks there are only two options: either undo the package, or go ahead and let the problems get worse. “Of course it is disappointing. You are prime minister for three weeks and then you make such a political mistake. However, if you continue, the already big problems could only get worse.

no solution

He concludes: “The BoE intervening to limit interest rate hikes is not a structural solution. It just gives you a bit of peace of mind. The only solution to this problem is to look at why interest rates go up so much and the value of the currency goes down so much. And it will always be — whatever the way You look at that – that planned policy. So if you want to solve the problem once and for all, you will have to distance yourself from the policy.

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