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…
