Could Greece’s troubles turn into a run on sterling?
The euro is tumbling against the dollar as Greece’s financial problems threaten the whole eurozone. Why then is the pound tumbling too?
Sterling is not even the fulcrum in the seesaw between the euro and the dollar: it has allied itself with one side and got the wrong one. While the pound has lost 10 per cent of its value against the US currency since the start of December, it has remained weak against the euro.
Continental Europe’s troubles ought to be Britain’s gain. They are primarily Greece’s troubles, but now that it belongs to the single currency, they are the whole eurozone’s problems. That means they have spread to Spain and Portugal and will affect larger north European countries as the stronger euro members have to dig into their pockets to bail out the weaker.
If hedge funds could still bet on the drachma they would have cleaned up by now and transferred their profits to the peseta and escudos like the sort of giant accumulator bets that caused contagion and chaos across European currency markets in 1992 and across Asia five years later. It was the winnings from betting against smaller currencies that gave the speculators their stakes to wager against the mighty sterling on Black Monday.
But this time a bet against Greece means having to take a position against the whole euro. Record short positions have been taken, but the hedge funds are fighting against the combined might of Germany and France this time. Greece may suffer through tax rises and spending cuts within the eurozone, but the north European members will ensure the zone sticks together.
But while fund managers are switching from euros to dollars they are selling sterling too. The UK currency has not benefited from the flight out of euros. Imports priced in dollars – most commodities including oil – have thus risen in price as the pound falls, whereas exports to our nearest neighbours have not got cheaper.
If there is rationality in the markets it is that sterling no longer has value as a reserve currency, possibly because it is too small; that Britain will suffer if its main export market is hampered by saving weak members; and that the UK’s deficit and debt problems are too similar to Greece’s.
The suspicion is that the UK government and Bank of England is not worried that the pound remains weak in this repositioning of currencies. They may indeed welcome it. There is no immediate appetite for raising interest rates to strengthen sterling and no point making exports harder by strengthening the exchange rate.
But if the speculators make money betting against the euro, where do they place their stakes next? A small currency like sterling backed by a country with economic troubles is surely worth a flutter? Instead of smugly thinking we have avoided the euro’s problems, perhaps British business should be preparing for a pre-election run on the pound?
