Could sterling fail before the dollar?

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eternal sunshine
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Could sterling fail before the dollar?

An interesting post today from the blog of Ambrose Evans Pritchard of The Telegraph



The slide in sterling has turned "disorderly".

We can argue over whether or not the first phase of
devaluation acted as a shock-absorber for a badly mismanaged economy,
providing a cushion against debt deflation and the housing crash. But
the latest dive has a very malign feel.

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

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)

If the Government is forced to nationalise RBS and
perhaps Barclays with their vast exposure in dollars, euros, and yen,
it risks being submerged. It is one thing for a sovereign state to let
its national debt jump in a crisis -- or a war -- perhaps even to 100pc
of GDP. It is another to take on foreign debts on such a scale with no
reserves. Yes, the banks have foreign assets as well to match the
debts. But how much are these assets really worth?

This is the moment when the "rubber hits the road"
-- to borrow from American argot -- the moment when the reckless debt
experiment of our economic and political leaders comes back to haunt.

We cannot even do what Iceland did to save its skin.
Reykjavik refused to honour the foreign debts of its buccaneering
banks. It let them default, parking the losses in Resolution
Committees. Small islands can do that. Iceland has fish instead, and
lots of metals.

Britain cannot follow suit. The debts are too big.
If London takes such disastrous action it will set off global panic and
lead to an asset death spiral, drawing the entire world into deep

What have our leaders wrought? The reckless conduct
of City, the fiscal incontinence of Gordon Brown (3pc deficit at the
top of the cycle), and the pitiful regulation of the UK housing boom
have all combined to bring the country to the brink of disaster.

England has not defaulted since the Middle Ages. There is a real risk it may do so now.

And no -- just so there is no misuderstanding -- it
would not have been any better if Britain had joined the euro ten years
ago. The bubble would have been just as bad, or worse, as Ireland and
Spain can attest. We have our disaster. They have their disaster. When
the dust has settled in five years we can make a proper judgement on
the sterling-EMU issue. Not now.

The Baby Boomers have had their moment in power. The
most spoilt generation in history has handled affairs with its
characteristic hedonism. The results are coming in.

The blithering idiots.


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