Public debt and financial stability, a matter of sustainability? The case of the UK pension funds turmoil of September 2022[Dette publique et stabilité financière, une question de soutenabilité ? Le cas de la crise des fonds de pension britanniques de septembre 2022]

This paper discusses the role of public debt in the financial system, and its implication for financial stability. To this effect, we look at the UK pension funds turmoil of September 2022, which was, so the story goes, caused by Liz Truss' government "mini-budget" announcement of September 23, 2022. In taking a closer look, we show that financial instability arose not from excessive deficits, but from vulnerabilities in sovereign debt markets. Specifically, liability-driven investment (LDI) strategies employed by pension funds, which relied on repo financing of gilt inventories, precipitated a liquidity spiral when yields rose abruptly around the time of the announcement. This challenges both the prevailing description of the events of September and October 2022, and mainstream accounts of the link between public debt and financial instability, as both accounts insist on the role of unreasonable public deficits. Our analysis highlights the need to study this link through the lens of market practices rather than fiscal "fundamentals" alone.