9
Sep
A sterling pounding but not a bloodbath
ARTICLE FROM THE SUNDAY TIMES - 07.09.08 BY DAVID SMITH...
Friendless, lonely, unloved. No, not the opening line of my misery
memoirs but poor old sterling, which is looking sicklier than an
old green pound note. Since the credit crunch broke just over a
year ago sterling has been one of the casualties. Its problems were
disguised by the dollar being even sicker, so as recently as July
you could still get two dollars to the pound, well above its 'fair
value' of closer to $1.60. But the dollar has recovered amid rising
optimism about the American economy. The tide has gone out on
sterling and to paraphrase leading investor Warren Buffett, it does
not appear to have been wearing any bathing trunks and has dropped
below $1.80. Is this a good old-fashioned sterling crisis, the
first under this Labour administration? If so, Gordon Brown's
government will be belatedly following the pattern established by
all its Labour predecessors. The Tories have had fewer, though they
can claim a couple of corkers, both of which involved Europe - the
short-lived flirtation with the European currency 'snake' in 1972
and the ERM (exchange rate mechanism) debacle of 1992. This time,
the pound has lost more than 10% against the dollar in a month,
while its average value has fallen 16% since August last year. If
this is new Labour's sterling crisis what will be the consequences?
Since autumn 1996 until last summer sterling was strong and stable.
Early last year its average value was its strongest since the
1980's and it stood at a 26 year high against the dollar. Sterling
benefited from big flows across the exchanges, into City markets or
as a result of the takeover of British firms by foreign
competitors. What changed? The flows were sharply reduced. More
importantly, Northern Rock, and the queues of anxious depositors,
shattered the impression of a well regulated economy and banking
system. International investors who subscribe to the Blink theory -
first impressions count - took a look at the run on the Rock and
took flight. The Rock was the catalyst for rerating, downwards, of
sterling. It exposed short comings in the Bank of England,
Financial Services Authority and Treasury. It coincided with a big
increase in political risk in Britain, as viewed by the markets.
When Tony Blair was in charge, investors saw Britain as politically
stable, boringly so. The decade-long saga of Brown versus Blair was
entertaining but irrelevant. Under Brown, in contrast, dealers have
perceived a government persistently in trouble, particularly since
'the election that never was' last autumn. When the government is
in trouble, the currency is usually not too far behind. Why, apart
from the dollar, has the pound taken such a dive in the past few
weeks? Bizarrely, to me at least, currency dealers are still taking
at face value Alistair Darling's comments last week that the
economic circumstances faced by Britain are the worst for 60 years.
Even after a week of nervous broadcast interviews from the
chancellor meant to clarify things, the perception remains that he
must know something we do not -and, in an unguarded moment on his
remote Scottish hideaway, blurted it out. That was not the case. I
have found myself raging a the television at his inability to get
over the message that, first, global challenges may be the toughest
for 60 years but, second and more importantly, Britain is not
facing the biggest downturn for 60 years, and nothing comparable
with the recessions of the 1970's, 1980's or early 1990's.