Tension in the UK and EU credit markets is reaching crisis levels Tension in the UK and EU credit markets is reaching crisis levels Tension in the UK and EU credit markets is reaching crisis levels

Tension in the UK and EU credit markets is reaching crisis levels

Christopher Dembik

Head of Macroeconomic Research

Summary:  The United Kingdom is becoming one major credit risk, not only for GBP assets but also for the rest of the world. Tension is increasing in global credit markets, especially in the Eurozone. Several indicators are not in the risk-zone, but it is time to stay careful. All our team are constantly monitoring the situation to provide you with the latest updates.

What is happening ?

The IMF and several rating agencies expressed concerns about UK Prime minister Liz Truss’s fiscal package :

"Given elevated inflation pressures in many countries, including the UK, we do not recommend large untargeted fiscal packages at this juncture, as it is important fiscal policy does not work at cross purposes to monetary policy" - IMF

In addition, the IMF indicated that they are "closely monitoring economic developments in Britain and [ they are ] engaged with the UK authorities". This is a very strong and unusual statement from the IMF.

Several rating agencies have also warned that the UK’s new fiscal policy regime is "credit negative" - Moody’s.

This has increased massive selling in GBP and pushed UK yield into risky territory. In the space of a few days, the UK 5-year CDS jumped to 38 basis points – this is close to the levels reached at the start of the Covid-19 outbreak – see Chart 1. This is a clear sign of market tension.

At mid-day, the Bank of England had no other choice but to step in in an effort to restore market confidence. The Bank indicated they will carry out temporary purchases of long-dated UK government bonds from today in order to "restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses". It is too early to say whether this will be successful or not.

What is the problem ?
On 23 September, the UK government unveiled a new fiscal package which will increase the level of public debt and might complicate the Bank’s task to lower inflation. This resulted in a drop of confidence in the country. This is a problem for any country facing such a situation. But this is worse for the UK. The country is more reliant than ever on inflows of foreign money to finance its excess consumption. The current account deficit was at a record high of 8.3 % of GDP in the first quarter this year. Even in the best case scenario, if it falls to 4 %, this will be complicated to finance. As foreign investors head for the exit worried about the government’s ballooning pile of debt, there is a material risk that the UK might not be able to attract enough foreign capital to fund its debt at current levels of interest. In the worst case scenario, the UK might need to be forced to sell assets to foreigners. But we are not in this situation yet.

What are the consequences ?
The UK is becoming a major credit risk not only for GBP assets but also for the rest of the world, primarily the eurozone. We see some kind of contagion effect in the eurozone credit market.

The spread between the 10-year Italian government bond and the 10-year German government bond which serves as a benchmark is above 250 basis points again – see chart 2. It is now back to pre-Covid levels when ECB President Christine Lagarde put her foot in her mouth by saying that "the European Central Bank is not here to close spreads". The widening in spreads not only reflects concerns about Giorgia Meloni’s victory in Italy but contagion from the UK credit risk too.

We also closely monitor broader measures of financial stress, such as the ECB Systemic Risk Indicator – see chart 3. It is above 0.40 – which is usually considered as the risk-zone. If it continues increasing, it could reach in a matter of weeks levels of 2011 – at the peak of the European sovereign debt crisis. Here again several factors play a role (the European energy crisis, the risk of a eurozone recession etc.). But contagion from the UK is noticeable as well.

We are now in a situation where the markets could easily break. We cannot exclude that other central banks will step in, following the examples of the Bank of England, if financial conditions continue to deteriorate. This is the right moment to be careful if you are exposed to the market.


Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.