Pound Sinks As Britain Teeters On Edge Of Bankruptcy; Is Sterling About to Tank?

[girl gone mad]

http://globaleconomicanalysis.blogspot.com/2009/01/pound-sinks-as-britain-teeters-on-edge.html

The British Pound has imploded on fears of bank nationalization and Prime Minister Gordon Brown’s plan to give the Bank of England unprecedented powers to buy securities. This chart paints the not so pretty picture.

British Pound vs. US$ Monthly Chart



Pound At Lowest Level Versus Dollar Since 1985

Bloomberg is reporting Pound Falls to Lowest Versus Dollar Since 1985 on Bank Concern.

The pound fell to its weakest level against the dollar since Margaret Thatcher was U.K. prime minister and dropped to a record against the yen for a second day on speculation the government will nationalize banks.

“The U.K.’s imploding,” said Jonathan Gencher, Toronto- based director of currency sales at BMO Capital Markets, a unit of Canada’s fourth-largest bank. “You have all the concern about the financial sector and which banks are going to be nationalized. You have expectations that the Bank of England is going to be moving toward zero interest rates. That’s weighing on the pound.”

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http://www.nakedcapitalism.com/2009/01/is-sterling-about-to-tank.html

Is Sterling About to Tank?

Willem Buiter, who had a ringside seat at the Iceland meltdown, warned that the UK could follow back in November:

With the pound sterling dropping like a stone against most other currencies and credit default swap rates on long-term UK sovereign debt beginning to edge up, this is a good time to revisit a suggestion I made earlier on a number of occasions (e.g. here, here and here), that there is a non-trivial risk of the UK becoming the next Iceland.

The risk of a triple crisis - a banking crisis, a currency crisis and a sovereign debt default crisis - is always there for countries that are afflicted with the inconsistent quartet identified by Anne Sibert and myself in our work on Iceland: (1) a small country with (2) a large internationally exposed banking sector, (3) a currency that is not a global reserve currency and (4) limited fiscal capacity.

In the rest of a quite long and detailed post he shows how the UK is indeed at risk.

Fast forward, today we have a post from Ambrose Evans-Pritchard on the plight of the pound. Even by his standards (he has a great fondness for apocalyptic views), he is, as he warns, "Seriously Alarmed":

The slide in sterling has turned "disorderly"....

For the first time since this crisis began eighteen months ago, I am seriously worried that British government is losing control.

The currency has fallen five cents today to $1.39 against the dollar. It is now perched precariously on a two-decade support line -- the levels tested in 2001 and 1992. If it breaks that line, traders may send it crashing down towards dollar parity.

The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn. (on this, more later in a piece I'm writing today)

[Joanne98]

1. Oh man.

[bullimiami]

2. man and the dollar isnt worth shit now.

[Warpy]

5. The dollar has rallied a lot

since it's finally been acknowledged that there's a huge problem with our financial system.

Back when the Dow was at its highest, the Euro was worth $1.59. Now it's $1.29.

[xchrom]

3. 'crashing' to dollar parity ---- hmmmmmmph?

god knows i love england -- but i've never been able to understand the strength of the pound.

doesn't keep me from going -- i just haven't seen any thing that tells me it should be that way -- other than the brits have a very strong financial sector -- which may very well suck bad for them now.

[SheilaT]

4. One way to think about this is

to realize that now is a good time to visit the UK.

[girl gone mad]

6. Especially if you like riots.

I can't even imagine what a bankruptcy in the UK would look like. Would they have an emergency conversion to the Euro or would the IMF step in and bail them out? What assets would they be forced to give away? Buckingham Palace and the crown jewels?

[Statistical]

7. Unlikely the UK would be allowed to convert to Euro under "emergency" conditions.

It wouldn't resolve the underlying issues and the UK problem would spread to Eurozone.

Instead of parity between $ and pound we would see parity or worse between $ and Euro.

Ironically one of the reasons UK resisted adopting the Euro was fear that the other Euro states (especially marginal ones) would devalue the Euro.

Maybe AFTER the crisis UK will be more agreable to joining the Euro currency as having a seperate currency provided no protection.

[Hawkowl]

8. Holy Crap!!!!

Looks like Britain's Great Bush Depression is imminent with a vengeance. Guess rejecting retiring the Pound in lieu of the Euro was a bad idea?