Why the Epstein scandal could bring down Starmer’s UK government

Last week’s release of more Epstein files set off a chain of events that left British Prime Minister Keir Starmer fighting for his political life, even though he had never known the deceased financier and sex offender.

Mr Starmer is under pressure over his decision to appoint Peter Mandelson as US ambassador, despite knowing of Mr Mandelson’s relationship with Mr Epstein. The latest documents released by the U.S. Department of Justice reveal further messages between Mandelson and Epstein, including after Epstein pleaded guilty in Florida to a felony charge of solicitation of prostitution involving an underage girl.

Mr Starmer, who is facing calls for his resignation, apologized to Mr Epstein’s victims for believing Mr Mandelson’s “lies”.

Mr Starmer’s ministers are trying to rally around Mr Starmer as they face growing anger from opposition parties and members of his own party over the decision to appoint Mr Mandelson.

Pressure increased after two people resigned in quick succession, with Starmer’s chief of staff Morgan McSweeney and communications director Tim Allan both quitting.

The scandal prompted Anas Sarwar, leader of Starmer’s Labor Party in Scotland, to demand that Starmer resign.

“The distractions must end and the leadership of Downing Street must change,” Sarwar told a press conference on Monday.

Mr Starmer later held a key meeting with Labor MPs, during which he reportedly said he was “not prepared to resign”.

A spokesperson for the Prime Minister’s Office could not be reached for comment.

Mandelson has been a key figure in the centre-left Labor Party for decades, playing a central role in the so-called New Labor movement that led to Tony Blair’s landslide victory in the 1997 general election and the rise of Prime Minister.

Mr Mandelson, known as a behind-the-scenes fixer and nicknamed the “Prince of Darkness”, was a Labor MP from 1992 to 2004 and served in Blair’s cabinet.

He left Parliament to become European Commissioner and returned to the UK in 2008, where he was appointed an unelected member of Parliament’s House of Lords, working with then Prime Minister Gordon Brown.

Mr Starmer, who became prime minister in July 2024, appointed Mr Mandelson as ambassador to Washington in December 2024, describing the role at the time as a “huge honour”. The appointment was controversial, as Mandelson had previously resigned twice (in 1998 and 2001) over scandals. The first case concerned a failure to declare a loan, and the second related to allegations of influencing a passport application.

Mr Starmer removed Mr Mandelson from his ambassadorship in September after Downing Street announced new information had emerged about the extent of Mr Mandelson’s relationship with Mr Epstein.

Then, last week, the release of millions of files by the U.S. Department of Justice revealed further links between Mr. Mandelson and Mr. Epstein. These led to accusations that Mr. Mandelson had sent market-sensitive government information to Mr. Epstein after the 2008 global financial crisis.

At one exchange, Mr. Mandelson appears to have given Mr. Epstein advance notice of an impending 500 billion euro bank bailout in 2010.

In a statement to British broadcaster Sky News last month, Mandelson apologized for remaining friends with Epstein even after his 2008 conviction.

“I was innocent and had no knowledge of what he was doing. I regret the fact that these helpless women were not given the protection they were entitled to expect and I will regret it until the day I die,” he said.

The UK government’s borrowing costs soared on Monday as pressure mounted on Starmer.

By Tuesday, yields on British government bonds, known as gilts, had fallen after many ministers rallied behind the prime minister.

Benchmark yield 10 pension was 3 basis points lower at 4.496%. 30 year gold coin The yield also fell by 4 basis points to settle at 5.309%.

“The uncertainty surrounding Keir Starmer’s future is not good for the UK bond market, especially as inflation looks set to fall quite sharply in the coming months, and the Bank of England appears to be preparing for a rate cut as early as March, with one or two more cuts planned for the rest of the year,” Shackleton Advisors head of investment Charlie Lloyd said in a note on Monday.

Mr Starmer’s resignation would trigger a leadership battle within the Labor Party to replace him, which would “almost certainly lead to short-term instability in the UK bond market and higher borrowing costs as yields rise,” Lloyd added.

“Aside from the potential impact on consumer confidence, if gold yields trade at a premium to other bond markets for an extended period of time, there could be an extended period of competition that could impact the economy,” he said.

If Mr Starmer resigns, a leadership race will begin to replace him, with a series of votes narrowing down the candidates. If Mr Starmer refuses to resign, but his challenger wins enough support to trigger a leadership vote, the prime minister and his challenger will be put to a vote. Both processes can take several weeks.

Possible candidates to replace Starmer include left-leaning Angela Ryner, who resigned as deputy prime minister in the fall of last year following a tax scandal, current health secretary Wes Streeting, and former party leader Ed Miliband.

The current mayor of Greater Manchester, Andy Burnham, was recently blocked from standing in a special election that could have brought him back to parliament, paving the way for a potential leadership challenge.

Despite Mr Burnham’s popularity, investors are wary of a change in direction from Mr Starmer and Chancellor of the Exchequer Rachel Reeves’ efforts to strengthen Britain’s finances.

Callum Pickering, Peel Hunt’s chief economist, said in a note on Tuesday that Mr Burnham is “strongly rated in opinion polls” but “whether the success of his regional economic policies translates into success of national policies is an open question. His past comments that the UK is ‘reliant on the bond market’ have made investors wary.”

Mr Pickering said the fact that Mr Rayner remained under investigation over tax matters “damages her chances and jeopardizes the narrative of replacing one scandalous prime minister with another”. But he added: “Her popularity within the party suggests that she could unite the left and the moderates.”