Markets punish UK for saving markets

by | Jan 20, 2009


It’s been another terrible day for the pound as markets punish the British government for stepping in to prop up… the markets:

Analysts said the [latest bailout]… shone a particularly unflattering light on the state of the British government’s finances as it was forced to take an ever-increasing role in the private sector.

James Hughes at CMC Markets said: “Any support seen through yesterday’s session for sterling is looking to be little more than wishful thinking as currency markets take on board the fact that the UK government is risking looking like a huge bank with some legislative functions attached, as RBS now seems to be teetering on the brink of full nationalisation.”

Credit ratings agencies are also enjoying the party, despite being utterly discredited. When they downgrade the UK’s credit rating, the current devaluation (which has upsides) may turn into a rout (which won’t):

The Commonwealth Bank of Australia lowered its forecast for the pound to $1.50 by the end of June from a previous estimate of $1.60, citing a high risk of a cut to the UK’s credit rating outlook. Richard Grace, CBA’s chief currency strategist, warned in a note on Tuesday that UK debt may now be greater than forecast due to the government’s additional bank bailout plans and cited the “high risk” of a downward revision to the ratings outlook for the UK.

Any downgrade wil force many investors to sell their UK government debt, raising the government’s cost of borrowing. The FT’s Lex thinks there’s one thing that will stop a run on the pound – all the world’s other major currencies are screwed too…

Author

  • David Steven is a senior fellow at the UN Foundation and at New York University, where he founded the Global Partnership to End Violence against Children and the Pathfinders for Peaceful, Just and Inclusive Societies, a multi-stakeholder partnership to deliver the SDG targets for preventing all forms of violence, strengthening governance, and promoting justice and inclusion. He was lead author for the ministerial Task Force on Justice for All and senior external adviser for the UN-World Bank flagship study on prevention, Pathways for Peace. He is a former senior fellow at the Brookings Institution and co-author of The Risk Pivot: Great Powers, International Security, and the Energy Revolution (Brookings Institution Press, 2014). In 2001, he helped develop and launch the UK’s network of climate diplomats. David lives in and works from Pisa, Italy.


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