LONDON – For Ms Liz Truss, the end came on Thursday in a midday meeting with grandees of the Conservative Party. But Ms Truss’ fate as prime minister was all but sealed three weeks earlier when currency and bond traders reacted to her new fiscal programme by torpedoing the pound and other British financial assets.

The market’s swift, withering verdict on Ms Truss’ tax-cutting agenda shattered her credibility, degraded Britain’s reputation with investors, drove up home mortgage rates, pushed the pound down to near parity with the American dollar and forced the Bank of England to intervene to prop up British bonds.

That repudiation, measured in the second-by-second fluctuations of bond yields and exchange rates, mattered more than the noisy departures of Ms Truss’ Cabinet ministers or the hothouse anxieties of Conservative lawmakers that ultimately made her position untenable.

For that reason, world leaders, buffeted by economic challenges, are watching the turmoil in Britain with anything but relish, concerned about the stability of Britain itself.

Interest rates, energy costs and inflation are rising around the world. Labour unrest is proliferating across borders. Non-British pension funds potentially face the same financial stresses that afflicted those in Britain. The last thing leaders want is for Ms Truss’ woes to be a harbinger for other countries.

President Emmanuel Macron of France, who recently mended fences with Ms Truss after she refused this past summer to characterise him as a friend or foe, said: “I wish in any case that Great Britain will find stability again and move on, as soon as possible. It’s good for us, and it’s good for our Europe.”

Fatal miscalculation

Ms Truss, economists said, is correct to argue that markets are driven by global trends broader than her tax cuts. Central banks worldwide are raising rates to battle inflation, which has been fueled by a surge in demand as the coronavirus pandemic ebbed and a spike in gas prices driven by Russia’s war in Ukraine.

“The problems are by no means all Ms Truss’ doing, but she should have known that getting blamed for everything comes with the territory,” said Mr Kenneth Rogoff, a professor of economics at Harvard University and a scholar of financial upheavals.

“What is really worrisome now”, he said, is that the situation in Britain “might be the canary in the coal mine as global interest rates keep soaring, especially as they do not seem likely to come down anytime soon.”

Ms Truss long cultivated a reputation as a disrupter and a free market evangelist in the tradition of Margaret Thatcher and Ronald Reagan. Her tax cut proposals made her an outlier among leaders of big economies fighting inflation.

But she made no apologies for offending either economic orthodoxy or the expectations of financial markets in pursuit of her vision of a “low-tax, high growth” Britain.

“Not everyone will be in favour of change,” a defiant Ms Truss said a week ago at the annual meeting of the Conservative Party, even though one of her planned tax cuts, for high-earning people, had already been reversed. “But everyone will benefit from the result: a growing economy and a better future.”

The prime minister’s fatal miscalculation, experts said, was to believe that Britain could defy the gravity of the markets by passing sweeping tax cuts, without corresponding spending cuts, at a time when inflation is running in double digits and interest rates were rising.

‘Institutional vandalism’

“It was the combination of the wrong fiscal policy at the wrong time – borrowing when rates were rising rather than, as in 2010s, when they were low,” said Mr Jonathan Portes, a professor of economics and public policy at Kings College London.

He cited what he called Ms Truss’ “institutional vandalism”, in particular the way she and her ousted chancellor of the Exchequer, Mr Kwasi Kwarteng, broke with custom by announcing sweeping tax cuts without subjecting them to the scrutiny of the government’s fiscal watchdog, the Office of Budget Responsibility.

In that sense, he said, Ms Truss was following in the footsteps of her predecessor, Mr Boris Johnson, who resigned as prime minister barely three months earlier after a series of scandals prompted a wholesale walkout of his ministers.

Mr Kwarteng’s budget manoeuvring led many in the markets to suspect the government was engaged in a kind of fiscal sleight of hand, which would inevitably require massive borrowing to cover a hole in the budget estimated at £72 billion (S$115 billion).

Mr Kwarteng, who studied the history of financial crises as a doctoral student at Cambridge University, brushed off the blowback in financial markets as a temporary phenomenon. Like Ms Truss, he is a believer in disruptive change. Together, they were among the authors of “Britannia Unchained”, a manifesto for a Thatcher-style, free market revolution in post-Brexit Britain. Among other things, the authors described Britons as “among the worst idlers in the world”.

Long-term damage

When, or even whether, Britain can fully recover from this period of political and economic turbulence is not yet clear. On Thursday, as news of Ms Truss’ resignation broke, the pound rose against the US dollar and yields on British government bonds fell.

Virtually all the government’s planned tax cuts have been reversed, and the next prime minister, regardless of his or her politics, will have little choice but to pursue a policy of spending cuts and strict fiscal discipline. Some fear a return to the bleak austerity of former prime minister David Cameron in the years after the 2008 financial crisis.

“Rishi or another can steady the ship and calm the markets,” Mr Portes said, referring to Mr Rishi Sunak, a former chancellor who ran unsuccessfully against Ms Truss and may seek to succeed her. “But it’s hard to see how, given the state of the Conservatives, any Tory prime minister can repair the longer-term damage.” NYTIMES