Another day, another plunge for sterling – it’s at E1.022 and the slide shows no sign of tailing off. The world is beginning to worry that the kids are running the sweet shop in the British economy – and that mum has gone to Iceland. Well, not quite, but the Reykjavik-on-Thames scenario – while still very unlikely – is becoming vivid enough to cause alarm. So far this month, sterling is off 13% against the Euro and 16% against the Swiss Franc (probably the most stable currency right now). And today’s 1.43 US$ to the pound is still far removed from the $2.00 we had until August.
It is obvious that Brown will have to plead for yet more borrowing in the next budget – and, given that his last set of forecasts were fictitious, why should there be any confidence any repayment this time? A kind interpretation of sterling’s fall is that the market is naturally adjusting to the prospect of another Bank of England rate cut. But that doesn’t explain why Britain’s credit default swap (the premium which shows how likely a country is to default) has soared. It’s now double that of France and treble that of Germany. For reasons that perhaps a psychologist can best explain, Gordon Brown’s soundbites are normally the precise reverse of the truth. Best placed to withstand the economic downturn? The market thinks the exact reverse is true, hence everyone is ditching the GBPeso. And with UK gross debt at 400% of GDP, four times that of America, no wonder.
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