Will the lifebuoy keep bobbing for a while, or will it be retrieved soon? Messages to floundering British pension funds from their savior, the Bank of England, have been quite contradictory over the past 24 hours. Andrew Bailey, the chief of the central bank, said on Tuesday evening that the Bank of England will really stop after Friday with the emergency buyback of government bonds, with which it keeps pension funds afloat. They have run into acute problems due to the sharp rise in interest rates on British government debt. The central bank is now pushing interest rates with emergency buyouts. On Wednesday morning, the British business newspaper Financial Times reported that Bank of England employees had given the pension sector the exact opposite message: that the central bank would continue to help them if necessary. A Bailey spokesperson then reported that the pension sector will have to do without support from Friday. It is not an example of clear communication from the central bank, which must preserve financial stability in turbulent times. The Bank of England is risky. She feeds the uncertainty in a time that is already very uncertain. Globally, concerns are growing about peaking inflation, central bank interest rate hikes, the energy crisis and the threat of recession. Those concerns can easily turn into panic in vulnerable places in the financial system. The British pension system has proved to be such a vulnerable spot in recent weeks. It all started because of decisions by another rather risky player at the moment: the British government of Prime Minister Liz Truss. The substantial tax cut she promised at the end of September, worth just under 45 billion pounds (about 51 billion euros), made investors doubt the sustainability of British government finances. As elsewhere in Europe, it is already under pressure from the energy crisis. Interest rates on British government bonds shot up from around 4 to 4.5 percent on ten-year bonds. The rising interest rate hit the pension funds via a sidetrack. They are constantly trying to shape their assets in such a way that they can pay out their pensions in the future. Investments with a higher expected return are more risky and the associated risks are hedged with a variety of financial products, such as interest rate exchange contracts ( swaps ). In exchange for these constructions, pension funds must deposit collateral; often these are (British) government bonds. When government bonds plummeted in value due to the reckless plans of Truss and her finance minister Kwasi Kwarteng, pension funds were urged by their banks to add money. They had to free up that money by selling the government bonds they owned, which further reduced the value. Then the Bank of England intervened, twice . That had an effect: interest rates fell again, to below 4 percent. But on Wednesday, the 4.5 percent had already been exceeded. The Bank of England assumes that pension funds have now tightened up their risk policies – which remains to be seen. Persistent inflation British pension funds probably operate more risky than, for example, Dutch ones. That is not to say that the financial turmoil is limited to the United Kingdom. The conditions under which the problems in the London financial market arose are similar or very similar in many other countries. Almost all countries have to deal with very high and persistent inflation. Their central banks are countering this by raising interest rates. Emerging economies have the problem that their currencies have been under pressure against the US dollar for some time. As a result, interest rates in those countries will rise even further. Amid that rapidly chilling financial climate, there is an additional problem virtually everywhere from the wealthy West to the very poorest countries. Economic support to households and businesses has already put a lot of strain on public finances. Government debts have risen sharply, and there is little or no further fiscal space in many countries. If countries want to do anything to support their citizens and businesses due to high energy and food costs, they must be careful that the support itself does not stimulate the economy too much. Because then they come into conflict with the policy of the central bank, which is trying to cool the economy with interest rate hikes, in order to bring inflation down. It all came together in the United Kingdom: a government that aims to spend extra and thereby stimulate the economy, but had to borrow extra to pay for it all. Investors who were shocked by the conflicting policy, the prospect of a wave of extra government funding, and a central bank that – completely against its own policy of increasing interest rates – had to push interest rates in order to quell the turmoil in the financial markets. IMF: dark clouds Is the UK a dress rehearsal for what’s to come elsewhere? The International Monetary Fund, which is holding its annual meeting in Washington this week, warns about this this week. The Fund already stated on Tuesday that the global economy is facing a very difficult time. In a subsequent report on global financial stability, the Global Financial Stability Report , the IMF went one step further. “The financial environment is fragile, with dark clouds on the horizon,” said Tobias Adrian, the Fund’s head of monetary affairs and capital markets. The financial markets are vulnerable, after sharp falls in the prices of both equities and tradable loans (bonds). Central banks are tightening their monetary policy to fight inflation. This means, among other things, that there is less money sloshing around in the markets and the tradability of shares and bonds decreases. A telling example is the difference between the buying and selling price of US government bonds. That is an indicator of how much and how smoothly those loans are traded. Until recently, the difference was around 0.003 percent and has now risen to 0.008 percent. That still doesn’t seem like much, but this is the most ‘liquid’ market in the world, where large sums usually move around with great ease and without too many transaction losses. Such an increase, Adrian says, creates a “volatile” (unsettled) and risky environment. His department’s IMF report speaks of “investors suddenly shying away from risk-taking as they rethink the economic and policy outlook.” Under those circumstances, ‘risks can be repriced in a disorderly manner’. When investors start to avoid risk, they do not do so in one market, and therefore not only in the UK government bond market. This quickly creates a correlation between the prices of different investments – equities and bonds – in different countries. Contamination is then not far away: unrest in one country spreads to another. Some investors are also looking for that. vigilante Mohamed El-Erian, advisor to the German insurance giant Allianz and former CEO of the large bond investor Pimco, warned on Tuesday about the rise of the bond vigilantes : investors who, like an overactive vigilante, look for countries that do not have their public finances in order. hold and become vulnerable. The vigilante’s speculation against the government bonds of those countries can then become profitable, and even cause the price drops that were warned about. Truss and Kwarteng have already become acquainted with this vigilante. Nobody wants to end up in a situation like that. In the Fiscal Monitor , an annual survey of global public finances, published on Wednesday, the IMF argues that monetary and fiscal policies should move in the same direction. They need to cool down the economy in order to reduce the current excessive inflation. Budget deficits are on the decline after massive spending on the pandemic. This is partly because that expenditure is no longer necessary, and partly because of the high inflation itself. Inflation erodes the value of debt, and so does government debt. But the energy crisis is increasing pressure on governments – especially in Europe – to once again provide generous support to citizens and businesses. And then shortages will increase again. The British Conservative government also piled ideologically driven tax cuts on top of that. All these considerations and risks are making the UK a guinea pig at the moment. Prime Minister Truss’s policy is at odds with what both institutions and the IMF as investors want. Can London compete with such a coalition? Will the UK become patient zero of a financial epidemic? It doesn’t have to. The British example can also act as a warning. Klaas Knot, president of De Nederlandsche Bank, told journalists earlier this week that “markets have become a lot sharper on loose fiscal policy”. It may be a blessing in disguise , a disguised benefit, that this happened “outside the eurozone,” Knot said. The eurozone also has its vulnerabilities, especially debt-laden and politically erratic Italy. That country, the IMF predicted this week, is heading for a recession. Whether the federation vigilantes will strike again – and if so, where – is one of the big questions for the coming, certainly turbulent months.