Trust in financial markets

Trust in financial markets

In this edition of the horizons, we focus on the relationship between economic policies and trust in the financial markets. Our center of attention lies on the similarity and differences that can be found in the (recent) past. 

Financial markets react to turmoil

The recent resignation of Liz Truss as Prime Minister of the United Kingdom, after her proposals for unfunded tax cuts rattled the financial markets, sparks the idea that financial markets can (at least partly) rule democracies. A similar thing happened in 2011 during the Eurozone debt crisis, when George Papandreou in Greece and Silvio Berlusconi in Italy stepped down after their parliaments passed the European bailout deals. When looking at bond yields – an important indicator of trust in implemented economic policies – the resignation of the prime ministers in Greece, Italy, and the UK happened when long-term interest rates were at a peak. After they stepped down, the rates normalized. This is where the similarity ends, however. In Italy and Greece, trust was restored when the bailout plans were approved and steps were taken to solve the debt crisis. It the UK, however, markets were less occupied with the thought that the government could not pay back its debts; they responded to the impact on the British pension system that was rattled by the political crisis.

Broaden Your Horizons

  • Last month, the Economist compared the UK with Italy in “Welcome to Britaly”. However, as the Financial Times points out in Britaly? You Wish the comparison fall short on some critical points.
  • In a reaction on the UK Austerity 2.0 package, Time describes how the government plans might backfire. In seeking to please the markets, the government may be inflicting more economic pain than is strictly necessary.
  • On Verdict, Neil Buchanan dives a bit deeper into the power of financial markets, describing the different ways governments might have to face “the Wrath of the Financial Markets”

Keeping the trust of the markets

While financial markets may not rule democracy, they are an important indicator of trust in the political leadership. If markets are already watchful of the plans of the political leadership, for instance because of high government debts, a single event can tip the scale and cause volatility in the financial markets. Following the recent turmoil in the UK, a new government had to step in to regain the markets’ trust in the British political leadership. Prime Minister Rishi Sunak and finance minister Jeremy Hunt revealed the new measures designed to balance the financial books, restore credibility on financial markets and delay financial pain for the population as long as possible. The UK will face tax hikes and spending cuts, while simultaneously raising minimum wages and providing support for the most vulnerable people. As political tensions within and between countries rise and looming recessions become reality, more governments will be walking this tricky path to keep the trust of the markets and avoid societal unrest.

Horizons is a bi-monthly Dasym Research initiative to show you how the Dasym themes have been in the news. We publish the Horizons on our website and as an email newsletter. If you wish to receive the email, sign up here.

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