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| Daily Jurojin - Thursday, April 23, 2009 |
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Thursday, April 23, 2009 British pound roils on Chancellor Darling's wordsDespite Chancellor Darling's efforts to close the credibility gap between his November forecasts for the U.K. economy and those of the IMF and OECD, the painful consequence appears as though it might overwhelm the recent recovery in the value of sterling, which has risen from $1.35 against the dollar to $1.50 in the space of three months, at a time when the dollar has broadly risen.The revision downwards in 2009 British economic growth to a 3.5% contraction falls woefully short of his last prediction of a 1.25% contraction just five months ago. The truth is that a recession of such global magnitude has stolen revenues and increased the need to spend, but the real crime stems from the shortcomings of the British banking system whose global presence ensured it received front page news when the house of cards fell. The nationalization of several of the country's most renowned banking names would have been laughable just 18 months ago, but the fact is that their follies have cost the taxpayer dearly. The overall tone of the budget was sound in that it gave back something to the public, despite the accelerated jump to a 50% income tax rate on earnings over Stg150,000. Within two years it should start earning over five billion pounds to the treasury's coffers. The problem for the Chancellor now is something that until now he has not needed to worry about. The level of the pound has for about 17 years been neglected ever since the day it was ejected from the Europe's exchange rate mechanism (ERM). It has not been a policy tool since the pound is often vulnerable to attack in what is a fickle market. The 2008 decline in the pound against both the euro and the dollar has effectively increased the nation's competitiveness. And while the Brits are unlikely to be complaining about the pound's current recovery, it may well have ended thanks to the revelations in this week's budget proposals. The trouble facing the Chancellor of the Exchequer now is that the outright debt levels which the economy finds itself at are the worst among the western world. That, my friend, is the cost of rescuing the banking system. Borrowing in 2008 by the government was 6.3% of GDP and will almost double to 12.4% in 2009. As Britain's FT tells us, this is several times the proportion of debt issued by governments in either Indonesia or Argentina. The problem facing the Bank of England now in its responsibility for running debt auctions for the government is that a death-spiral occurs. That would mean that excessive gilt supply fails to find buyers who can now see through the allure of 'riskless debt.' The government is realistically in a bind and that adds pressure to the value of the pound. Investors face a limit to the amount of debt that they can swallow from any supra-national. In the case of the United Kingdom, the shutters could come down prematurely as it's status has effectively shifted from triple-A to a B+ status now that the new gloomy predictions and debt issuance have had more light cast on them. The government will now face a declining pound, undermining its ability to reassure foreign investors that their sterling denominated capital is secure. While a weaker pound will undoubtedly grow exports, Britain will inevitably face a salvo of calls from its neighbors bickering about the mess it finds itself in. Former Governor of the Bank of England, Eddie George who sadly died at the weekend, single-handedly persuaded the incumbent Labour government of Tony Blair in 1997 to not attempt to join the twelve-nation Eurozone. He likened the performance of the pound to that of an 'elephant in a rowing boat,' should Britain join the gang. He'd be shocked to learn just one week after his death how true that analogy would turn out to be even outside of the single European currency. The Supreme Council of the Secret Order of Jurojin |
