Could the British government’s plan to borrow and spend its way out of a recession lead to a run on the pound?
George Osborne, the Conservative Party’s spokesman on such matters, warned of just such an outcome this month, and Business Secretary Peter Mandelson accused him of being “reckless and irresponsible.”
In the last few days, Osborne again accused British Prime Minister Gordon Brown of driving Britain toward bankruptcy, but he avoided any mention of what one of the biggest borrowing surges in British history might do to its already fragile currency.
All the same, a feeling is building that Osborne may have a point. The pound, already down more than 26 percent from its high of US$2.11 a year ago, could fall further once the economy begins to feel the strain from the increased debt.
“Any economy with our level of borrowing and our deficit of trade should have one of the world’s weakest currencies, not the strongest,” said Peter Hargreaves, chief executive of Hargreaves Lansdown, an independent brokerage firm in Bristol. “We don’t make anything anymore, and our biggest export was the City of London, which is in disarray. We are in a very poor state.”
Hargreaves sees the pound falling to US$1.25 — it was at US$1.54 on Friday — and he has recently moved ¥20 million into US Treasury bills and instruments denominated in, among other currencies, the Norwegian krone.
“I just don’t think this country understands how serious the problem is,” he said.
Britain has a deep, emotional connection with its currency, the world’s oldest still in use. Crashes, when they come — as they did in 1967, 1976 and 1992 — have been seen as moments of wrenching national shame.
The pound’s buoyant decade under Brown’s predecessor, Tony Blair, came to be seen as a lush emblem of Britain’s financial and popular resurgence. Middle Eastern and Russian billionaires accumulated British assets, and American investment bankers, once happy to be paid in dollars, schemed to see how they might manage to secure their bonuses in pounds.
Now, unemployment is rising, house prices are falling and economic growth is a faraway hope. Britain is seen as having relied too much on volatile sectors like housing, finance and retail. The numbers paint a stark picture: Britain’s public debt is expected to double to more than £1 trillion by 2012 — or about 60 percent of its GDP.
Still, when it comes to the currency — the ultimate barometer of an economy’s heath and future prospects — few forecasters have predicted an outright collapse. In fact, after touching a recent low of US$1.48, the pound has rallied, lifted by the government’s stimulus plan, which includes cuts in the sales tax and £3 billion in capital spending. Government officials said in the last week that the steep income tax increases built into the program, aimed at high earners, were there to assure currency markets that these high debt levels would not be permanent.
According to Bloomberg, the average forecast by City economists for the pound at the end of next year is US$1.62. It is US$1.66 for 2010. The City is London’s financial district. Of course, currency forecasting in the midst of a historic financial crisis is an imprecise art. And such estimates do not square with a growing pessimism about the pound’s future that can be readily heard from the salons of West London to the trading desks of investments banks, where a popular bet has become when, as opposed to if, the pound might hit parity with the dollar.