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BlackRock Stands at the Nexus Between Derivatives Blowing Up in U.K. Pensions and the Shortest Tenure of a Prime Minister in U.K. History

Wall Street on Parade | Oct. 21, 2022

Goodbye Liz Truss. We hardly knew ye.

Yesterday, Liz Truss announced she would resign as Prime Minister of the U.K. after just 44 days in office. That’s a new one for the record books in the U.K.

In her brief span in office, Truss had managed to create a financial crisis in the sovereign debt market, force a bailout by the Bank of England, trigger alarm bells about the safety of pension plans in the U.K., and fire her Finance Minister.  All of these events are interconnected. Here’s the short version:

On September 23 Truss’ Finance Minister (the Chancellor of the Exchequer) Kwasi Kwarteng announced big tax cuts which had to be funded through higher government borrowing because the Truss government had no clear plan for how to pay for them. This was interpreted by debt markets to mean bigger deficits, which sent the pound plunging, the bond market tanking and yields on longer-dated British bonds soaring. (When yields spike, the value of the underlying bond suffers losses. Plummeting bond prices, in turn, are bad for portfolios holding them. When leverage and derivatives are involved in those bond portfolios, losses are magnified.)

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