The latest flurry of cross-border violence from the Taliban has sent ripples through financial markets, with gilt yields edging up as investors factor in heightened geopolitical risk. For those of us who remember the chaos of the Soviet withdrawal, this is a familiar pattern: instability on the Afghan-Pakistan border rarely stays contained. The UK government’s statement of ‘close monitoring’ is cold comfort when capital flight from emerging markets is already accelerating.
Pakistan’s rupee is under pressure, and its sovereign bonds are taking a hit. Meanwhile, the Bank of England will be watching the impact on energy prices and trade routes, but let’s be honest: the real bottom line here is that fiscal discipline in the region is about to get a lot more expensive. Defence spending always crowds out productive investment, and this crisis is no exception.
The markets are pricing in a higher risk premium, and rightly so. Any hope of a quick resolution seems as distant as a balanced budget.
