UK in dire straits after finance minister's tears rattle markets

Prime Minister Keir Starmer was apparently unaware of his finance minister's distress as she sat behind him, tears ing down her face, in the House of Commons

The government insisted it was a "personal matter" that had upset Rachel Reeves but speculation mounted that she could be sacked, or could step down

Responded to the perceived distress, with bond yields spiking and the British pound surrendering ground against the euro and dollar

Prime Minister Keir Starmer and Finance Minister Rachel Reeves to his right, looking visibly upset, in the House of Commons on Wednesday

Image sourced under the Open Parliament Licence v3. 0All eyes are now on the U. 's ruling Labour Party for any sign of further political fractures that could rattle Britain's economic stability, after the extraordinary sight of the country's finance minister crying in parliament on Wednesday

Bond yields spiked and the pound sank against the dollar and euro as tears fell down Chancellor Rachel Reeves' face, as an apparently unaware Prime Minister Keir Starmer failed to back her when asked her position during a heated parliamentary debate

The market moves were abrupt, as traders speculated that Reeves could be to lose her job or potentially resign, taking her strict "fiscal rules" on spending and borrowing with her. "There are a lot of eyes on the U. ," Simon Pittaway, senior economist at the Resolution Foundation, told CNBC as the drama unfolded Wednesday. "When it comes to the [next] Autumn Budget, whoever the chancellor is, they'll have some really difficult decisions to make

And I think, as far as we're concerned, sticking to the existing fiscal rules is really crucial, that's a move that would signal kind of credibility and confidence to the market" at a time when the country is under heavy scrutiny, he told CNBC's Ritika Gupta. "Sticking to those fiscal rules, and depending on the government's priorities, some combination of higher taxes and lower spending, out towards the end of the forecast period might be the way forward," Pittaway said

The government scrambled the calm the situation amid spreading market tumult, with a spokesperson attributing Reeves's distress to a "personal matter" without ing further

The prime minister then told the BBC that he and the chancellor were "in lockstep" and that he fully backed her

The yield on the U. 's benchmark 10-year bonds, known as gilts, was down 6 basis points

On Thursday, Starmer and Reeves ed further on the drama in parliament with the prime minister telling Sky News that his finance minister had his full support, with the two politicians embracing as they att a public event on Thursday

Jack Hill | Afp | Getty Images"I have every faith in my chancellor," Starmer told reporters, adding that "she has made incredibly important decisions in the last 12 months and we wouldn't be doing what we're doing today without those important decisions," he told Sky News

The chancellor, meanwhile, refused to give the reason for her upset but said her job was to be present at the weekly Prime Minister's Questions session in parliament, and to support the government. "I guess the thing that maybe is a bit different between my job and many of your viewers' is that when I'm having a tough day it's on the telly and most people don't have to deal with that. "'Dire straits'Reeves has come under sustained pressure since the last Autumn Budget, during which she unveiled a massive boost to public spending that would be largely funded by a big tax hike on British es and employers

She also said she would be implementing two fiscal rules to get the U. 's debt pile and borrowing under control: firstly, that day-to-day government spending will be funded by tax revenues and not by borrowing, and, secondly, that public debt will fall as a of economic output by 2029-30

Justin Tallis | Afp | Getty ImagesThe rules gave Reeves' Treasury little fiscal "headroom," however, and the little leeway she did have has been further eroded by the government rowing back welfare spending cuts in recent months

After another government U-turn this week, this time on disability benefits, Reeves must now find savings elsewhere — tricky, when she's just announced a massive public spending plans — break her borrowing rules or go against Labour's campaign pledges and hike taxes on workers later this year

Watch now5:5005:50'Basic taxes will have to rise,' former UK Secretary saysSquawk Box EuropeOn a wider level, ing the climbdown on welfare, the Labour Party leadership will now have to wrangle with a rebellious group of backbench lawmakers who will feel emboldened to challenge the government on other potentially controversial reforms and spending cuts. "The nature of what's happened over the last 48 hours, with the government's welfare bill being torn up, it means that the government's political and economic strategy are in absolute dire straits at the moment," Max Wilson, director of public affairs at Whitehouse Communications, told CNBC on Thursday

Watch now3:5703:57UK government 'in an absolute bind' after U-turns, panic over Rachel ReevesSquawk Box EuropeThe government finds itself with "such little wiggle room" because of its previous political decisions and concessions to backbenchers, Wilson said. "Financially, economically, there's very little that they can do, and Rachel Reeves has such a tough job on her hands now, finding the extra money without reing to other actions that are going to upset the, including borrowing more or tax rises, so, really, I think the government left in an absolute bind here," he noted.