Now a currency crisis as well
As if we didn’t have enough of a financial collapse, the UK is also facing that regular curse of the past – a sterling crisis.
The pound is at a 12-year low against the trade-weighted basket of currencies and an all-time low against the euro. It has fallen 25 per cent against the dollar in three months. And it was plunging before interest rates, the normal support for an ailing exchange rate, were slashed.
The worry is that Britain is on a borrowing spree that we cannot afford later but which the world cannot afford now.
The government is borrowing to bail out the banks and borrowing to finance tax cuts. But if it takes money from UK savers it takes money out of the economy, which undoes the effects of the fiscal stimulus. Not that many people in Britain were in a saving mode even when they did have spare cash.
Three-quarters of the money Britain has borrowed in recent years has come from abroad, but with low interest rates and low growth prospects, foreigners have less reason to invest here – and if the pound is falling, those investors will find their deposits diminished when they repatriate them.
And with governments abroad also borrowing to rescue their own banks and stimulate their own economies, there is considerable competition for the limited deposits available. For the first time, UK bank rates are lower then the European Central Bank rate.
Yet the UK borrowing spree is expected to take government debt requirements from the £43bn forecast early in 2008 to more than £100bn by 2010. And the need to keep refinancing maturing stock means the state must raise £100bn to achieve that.
So the pressure is on sterling – and thus on ministers. Politics since the second world war has been measured by sterling crises, from Clement Atlee’s devaluation in 1947, Harold Wilson’s devaluation 20 years later, Edward Heath’s flotation of the pound, James Callaghan’s IMF rescue to John Major’s Black Wednesday.
A weak pound is inflationary – though recession may offset some of the higher prices. In theory it makes exports easier, but foreign customers are in little mood to buy and manufacturing is less than 20 per cent of the economy now. And it means Britain is not seeing the benefit of the falls in prices of commodities bought in dollars – especially oil.
Perhaps worse, however, currency is outside the influence of the government or central bank. Just as Gordon Brown seemed to be in charge, he is being undermined by a crisis beyond his control.
