Howard Wheeldon on the failing pound, hung parliaments and national debt...
I used to be so uncertain but now I am not quite so sure! Forgive me for using what is now a very well worn cliché again but it is one that on this occasion I consider near perfect to reason why sterling is being trashed. It is now drifting into territory that most self respecting currencies would fear to tread – a territory which would provide big warning signs to their respective governments! So, as we look at sterling today – down near 8% against the dollar so far this year – are we now staring at a permanent basket case or is there just a faint chance that the current situation could be turned to UK advantage? Either way, don’t be surprised if we are still some way off seeing an end to this latest sterling dump.
Take note that foreign investors see the UK economic plight in a somewhat different light to the message that Gordon Brown appears to be giving the UK electorate right now.
So what is it about the UK – what is it about sterling? Debt, deficit, downward momentum of gilts, an economy barely out recession and yet one that many justifiably believe may soon be back in, an economy burnt out for lack of ideas that had they existed and if assisted by a government intent on leading from the front might perhaps within a few years transform the UK economy from one so reliant on the consumer to one that could, with a bit of ingenuity, imagination and political leadership, manufacture a totally different course of wealth creation. It is barely any wonder that sterling is under renewed pressure. Add to this the unwelcome new momentum that Britain is now under serious threat of sovereign debt downgrading as markets increasingly fear the worst case hung parliament scenario and you have a natural recipe for yet another currency disaster.
Ever since Gordon Brown became yet another in the very long list of unelected British Prime Ministers, markets have taken the view that an election in 2010 or before would at least return a so-called business friendly Tory government. Such views had their roots in an electorate that appeared to be warming to David Cameron fast and an economy that until late 2007 at least remained in the midst of what was the longest unbroken period of growth in UK history (we’ll leave the falsity of that economy aside for now). Whether we blame Alan Greenspan, banks, other lenders, borrowers, the craze for financial instruments that few understood, on failed regulation or, in the specific case of the UK itself, on the thirteen years of financial imprudence and economic mismanagement of Gordon Brown – as both Chancellor and Prime Minister – which by 2008 had pushed the UK economy into reverse at a speed rarely ever seen before, there is little use looking back for a cure to what ails us. We must move forward finding new ideas along the way, using what we have learned from technology, consumer and industrial revolutions so that we may at some point move in a different direction. It’s a hard call – it’s a very hard task ahead as we must also pay down a considerable amount of built up debt and finally learn to live within our means.
Through all this turmoil one would have thought that bar the Tories and David Cameron would at the very least hold on to the significant lead they had established by late 2009, No such luck – the lead has been frittered away by the one machination that markets will not tolerate – uncertainty.
While markets to a great extent still discount the possibility of New Labour retaining overall power come May they continue to run with the idea that a hung parliament is the most likely option. For paying down national debt that has already hit close to £900bn there is little doubt that a hung parliament is absolutely the worst possible option. For instance, as we stand now I believe that chances of debt downgrading are minimal at least until the new government – whoever it is – has announced its first budget measures. In the case of the Tories we know that will be within twenty weeks. If Labour was to win a workable majority we would not likely see it until much later in 2010. However, in my view a hung parliament is terminal in terms of potential sovereign debt downgrading on the basis that like a committee hung parliaments have a tendency to disagree and to put off necessary options for change as long as they possibly can.
Justifiably, it seems that markets fret that the Greek situation could so easily spill over into other heavily debt and budget deficit ridden EU states such as the UK, Spain, Portugal and even Italy. They fret about the sell off in gilts, they worry about the lack of likely sustainable economic momentum, they worry about the impact of jobs and the reluctance of industry and commerce to create new jobs. They rightly worry about a potentially huge impact of the low pound sterling on ever rising levels of UK imports and that with minimal manufacturing and significantly reduced financial and other service based income to compensate the UK balance of trade deficit is also now unacceptable. The list of course is seemingly endless but the bottom line of this event is that some fear that the potential of post election mismanagement.
Should we be concerned about the fall in sterling value? We ignore it at our peril and what is going on now may dictate just how bad the next few years of the domestic economy will be. Neither should we allow ourselves to be lulled into any false sense of security that a low pound will automatically benefit the economy. Thirty years ago it might have but in a nation that right now just does not appear to have that much to offer foreign let alone domestic investors – not now.
Increasingly – day by day now – the message from international markets to the political leaders of all parties in the UK is that the first and only option that matters is to this year take active measures that will start the process of bringing down the government deficit. There is no other option, no other competence that matters more than this. It is a message that quite frankly says that for gain there must be immediate pain.
Howard Wheeldon is the Senior Strategist at BGC Partners