(Bloomberg) -- UK financial markets have been plunged into chaos since the government announced £160 billion ($174 billion) of unfunded tax cuts last Friday. The pound has hit a record low against the dollar, gilt yields have spiked and on Wednesday the Bank of England pledged unlimited buying of long-dated bonds to avert an imminent market crash.
Prime Minister Liz Truss, who's been in the job less than a month, pledged to stick to her guns in a round of local radio interviews on Thursday but the scale of the selloff has people asking whether she will survive.Where is Liz Truss today?Truss hadn't appeared in public since the tax cuts were announced before a rapid-fire series of short interviews with local BBC radio stations for the morning commuters. She was given a pretty tough time with one interviewer challenging her for repeating scripted answers and another simply asking, "Where have you been?" She was back a couple of hours later to try again with an unscheduled broadcast clip on Sky News. She's due to speak to local BBC TV later in the day.Will Liz Truss survive as prime minister?Truss came into power in a weak position because two thirds of Tory MPs had voted against her in the leadership contest — she squeaked into the runoff against Rishi Sunak and then won thanks to her support from party members. But the way she's handled her first major policy announcement has made her position much worse.
There are certain safeguards in place to protect her. Apart from anything else, she has a theoretical majority of almost 80 and it would look awful for the Tories to replace another prime minister without an election.
But her position is still extremely tricky: her economic policy is not sustainable given the market reaction and the longer she sticks to it the more damage she will inflict on voters and their finances. But it's the central plank of her proposition, so ditching and retaining any credibility would require a feat of political acrobatics that might be beyond her. The odds on her getting pushed out before year end are shortening.Will Liz Truss resign?It wouldn't exactly be in character. The lady's not for turning, you know.Will there be a vote of no confidence?The rules officially say no vote for 12 months. But MPs write their own rules and when they want to change them they can. The bottom line is that if a clear majority of MPs decide that her time is up, it'll be over pretty quickly.How did we get here?Britain’s self-inflicted financial crisis has been years in the making. It now threatens to accelerate the economy’s descent into recession — mounting even more pressure on the new prime minister. The big question is whether Truss’s three-week old administration can quickly restore credibility with investors.
(Corrects to say the BOE intervened in markets on Wednesday.)
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