Mr. Rishi Sunak on Tuesday became the U.K.’s third prime minister of the year following a meeting with King Charles III.

There’s been a fair degree of panic in the UK markets over the past month-or-so. Some might argue that the pound’s problems have not vanished just because former Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng have departed the scene. But Mr. Steve Barrow, Head of Statard Bank G10 Strategy begs to differ.

In her first 20-days in office, former Prime Minister Liz Truss saw the pound lose 10% of its value against the US dollar and nearly 7.5% against the euro. That’s a pretty spectacular collapse; something that we cannot remember happening to any former PM. The disastrous mini budget was seen as the catalyst for the slump but, as we have argued before, the real reason was the currency hedging strategy of some UK pension funds as this caused a forced selling of the pound as the gilt market imploded and certain pension providers were forced to raise cash quickly.

More simply put, the pound would have likely fallen to some degree following the unjustified fiscal largesse of the mini budget, but would not have imploded in the way it did without this complication in the defined benefit segment of the UK pension fund industry. The problem was clearly so bad that the Bank of England was forced to start buying gilts again to ease the liquidity squeeze in the market. This intervention, plus the replacement of Kwarteng with the more fiscally conservative Jeremy Hunt, has helped steady the gilt market – and the pound. But this has not left the UK unscarred.

All the major ratings agencies have downgraded the UK sovereign debt outlook to negative and if new Chancellor Hunt cannot close the yawning budget gap that still exists it might be the case that the pound could fall anew. However, Mr. Steve Barrow’s point is that while ups and downs will happen in the currency market, a panic of the sort we saw in mid-late September won’t happen again unless we see the same sort of financial frailties in the UK pension fund industry, or any other player in the financial markets.

No doubt many sterling bears will point to things like these outlook downgrades by the ratings agencies or the large deficit and debt metrics in the UK and suggest that the pound could be toppled anew. But the UK’s fiscal problems are not really much worse than anywhere else and, in fact, in many cases are far better. As we have argued many times, if you want to look at debt market vulnerability, then you should be looking at the euro zone not the UK. This is not just because some countries in the euro zone have much higher debt ratios than the UK – like Italy – but because the euro zone is unique given that countries issue debt but not money. With their recourse to monetary financing off limit s, debt crises can materialise quickly, just as we saw between 2010 and 2012.

The key question is not whether the new UK government, led by Prime Minister Rishi Sunak, will mess up again on the fiscal front. And it is not whether foreign investors suddenly decide to attack the UK. It is instead, whether the vulnerability in the UK pensions industry remains despite the BoE’s support or whether there are other pockets of similar vulnerability in the UK financial sector that can cause liquidity and even solvency fears to surge again. There does have to be a risk of this.

At the time of the turmoil, while the UK defined pensions benefit sector has specific problems, its underlying quest to use leverage to boost returns at a time of low returns before the Russian invasion of Ukraine, is probably to be found all over the place, and not just in the UK. The question is whether this creates vulnerability when rates move higher.

“We would hope that the UK pensions sector has learnt its lesson from the recent shock, but there could still be other sectors that have yet to learn their lesson – and not just in the UK. In fact, we’d even argue that the recent UK experience means that we have to look more towards other countries where such abrupt re-positioning has perhaps not happened. Here we would include the euro zone and even the US. If we are right about this, the pound may not be the currency that’s in the firing line next time”, said Mr. Steve Barrow.