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Pound sterling could be the next victim of the global economic crisis says HSBC

Posted on 08 January 2013 with 12 comments from readers

The pound sterling could slump this year as the problems of other currencies recede and refocus attention on problems like Britain’s persistent trade deficit and huge debts, according to HSBC.

Its latest report highlights a nasty ‘triple cocktail’ facing sterling as the US steps back from the fiscal cliff, momentum grows in China, and eurozone break-up fears diminish. HSBC warns, ‘The pound’s fiscal credibility is under threat as a sovereign downgrade looms.’

‘The pound looks set to lose the contest of the uglies as its frailties emerge from the shadows,’ concludes HSBC. The bank expects sterling to lose about five per cent of its value against the US dollar and end the year around $1.50.

No safe haven

Sterling has benefited from safe haven status in the financial storms of the past couple of years and basked in the supposed benefited of independence from the euro. It looks as if the tables are about to turn.

As ECB president Mario Draghi pointed out at the start of the year the economic fundamentals of the eurozone do stand out as far sounder than most of the rest of the world. To that extent austerity is working, though it is not working for the millions of unemployed, particularly in southern Europe.

A cheaper pound might help exports but the cost will come in higher domestic inflation. This will gradually erode the real burden of debt carried by the UK economy but then again interest rates will also rise so the cost of carrying this debt will go up and not down.

With so many UK consumers dependent on low mortgage rates this would be a disaster for many domestic households. Higher interest rates would therefore tend to depress UK house prices that have been resilient in the face of the global economic crisis thanks to record low mortgage rates.

Europhobia backfires

Does this mean the UK is going to suffer its own version of the crisis afflicting the peripheral states of the European Union with its independent currency backfiring badly? It could be that yet again the Europeans have the last laugh and the europhobic Britons end up paying for not being a full member of the club.

Certainly if you took Mario Draghi’s list of economic fundamentals that are sound in the eurozone, most of them would not apply to the United Kingdom. Currency devaluation might bring some relief but it is no cure all.

Here comes the day of reckoning for the UK!

Posted on 08 January 2013 Categories: Banking & Finance, Bond Markets, Global Economics, US Dollar

12 Comments posted by readers:

Comment by Bernard M.A.Doff - 08 January 2013

The pound falling by 5% is hardly a “day of reckoning for the UK”. It is simply the zigging and zagging of the markets.

Comment by Simon Bennett - 08 January 2013

This article shows a complete lack of understanding of the problems facing the Eurozone:

“It could be that yet again the Europeans have the last laugh and the europhobic Britons end up paying for not being a full member of the club.”

The Euro, as it is currently constituted, is not a workable currency, it is a political construct designed to force member states into a political union. If this political union does not happen, then it will fail. Either way, Britain is better off not being part of this project: in a political union there is a complete loss of sovereignty; and if the currency fails then an economic meltdown ensues.

Ed Note: Any political scientist will agree that you cannot have ‘a complete loss of sovereignty’ in a federal structure; and as for a currency failing, if the economic fundamentals are strongest in Europe then this is the last place it is going to happen, where’s the Grexit? That was just a load of UK baloney!

Comment by John Mark - 08 January 2013

The pound has fallen by 18% against my silver since 2001. I can now buy almost 20% more sterling now than I could in 2001, and I don’t think that sterling devaluation is going to stop at this level.

When sterling is valueless (or almost), I shall be able to feed the family by selling a little silver now and again. Certainly keeps the angst from the door!

The national and international investors in UK debt are not going to want the measly level of interest they’re getting at the moment, especially when the UK is downgraded from AAA. When the interest paid to gilt-edge owners whops upwards, the BoE interest rate is not, surely not, going to stay where it is now.

The gilt-edge owners have got to be paid because the government won’t be able to borrow enough for all its expenditures, and that’s disaster. So to avoid UK disaster, the government pays these bondholders more and more by taking more interest from UK plc.

But, then, as Ed says, a rising interest rate to pay the bondholders is going to be disaster for families and individuals and corporations. Going to happen in 2013.

Money printing to pay this increased interest to bondholders will devalue sterling, so bringing on hyperinflation for all -except those in silver (and gold).

Comment by Simon Bennett - 08 January 2013

Replying to Ed:

You obviously don’t live in Britain: we are not even in a federal Europe yet and we have lost control of our borders (around 250,000 net migration from other EU member states per year to which we cannot even vote to stop); we have lost control of our fisheries; we subsidise uneconomic farming practices in France; and we have lost control of our laws (the European court of human rights trumps our own courts if we wish to deport terrorists to say Jordan). Also, what political scientist will say that , for example, the state of Florida can defy federal law and has its own sovereignty – this is nonsense. State laws cannot determine migration, currency, and serious criminal laws – to name but a few examples. Sovereignty is like virginity, you either have it or you don’t; to suggest otherwise is to misunderstand the nature of sovereignty.

As for Grexit, it will happen – you wait and see. The only other alternative is a full political union, which I think is unlikely, but may happen. The reason that Grexit hasn’t happened yet is that there is still confidence in bond markets around the world. My own opinion is that this will evaporate at some stage when investors realise that the emperor has no cloths, i.e. printing money, zero interest rates and more debt can never cure a debt/systemic fraud problem. As we have seen, confidence has already evaporated in Greek bonds, and is rapidly dissipating in Spanish and Italian bonds (a much more serious issue).

Comment by James M - 09 January 2013

@Simon Bennett

Let me axe you a question. How much of England’s wealth, old money wealth is residing in the Caribbean, percentage-wise? And when controlling ex-Pax Britannia countries thru banking, what currency do you best recommend for the job? Britain underwrites shipping insurance and letters of credit in what? Bermuda Pounds? They and the French have a corner on underwriting a global trade market which if denominated in their own currency, benefits them more. Nothing will make them give that up, short of genocide.

Comment by John Mark - 09 January 2013

I’m not waiting for Grexit! As much as some believe it will happen, I believe it won’t happen.

Those, who believe that Grexit will occur, think in economic terms, but the EU and, therefore, the euro was not an economic instrument. Since it was all started and has continued up to the present day, its political purpose is still in existence.

Its political purpose is to ensure that contiental Europe remains at peace. Continental Europe must never go to war again. Since the nation states of continental Europe have always warred and fought each other, especially since the Reformation, the continental Europeans are still terrified of a return to this killing and carnage.

I’m sorry to keep repeating this word “continental” but the Brits have no idea of the fear and angst of further warfare on the continent of Europe. They just go back behind their watery castle wall and hurl epithets at those who live east of Dunkirk.

Indeed, when Dunkirk fell in the last war, the Brits were ferried back to their island fortress whilst the Continentals had to endure years and years of pillage, exile and even holocaust.

So, be quiet, my fellow Brits. It may be our day soon when the English Channel is no defence against ICBMs, and we will be as scared of war as the Continentals are.

Comment by tim mckee - 09 January 2013

PC (my little joke) used to be less resilient of true interest in his readership..w/ a shout for Simon Bennett & others, it appears he is more trusting now of divergent opinion, the valid proof of a great – the A$ logo was my gift to PC 3 yrs ago

Comment by Bernard M.A.Doff - 09 January 2013

“When sterling is valueless (or almost), I shall be able to feed the family by selling a little silver now and again”

Priceless to those who enjoy the fun of a pun!

Comment by Bernard M.A.Doff - 09 January 2013

@ Simon Bennett
“As we have seen, confidence has already evaporated in Greek bonds”

Perhaps you fell asleep in May 2012 and missed the rest of the year?

Comment by Simon Bennett - 10 January 2013

@Bernard M.A.Doff

Perhaps you have never woken up?

Comment by Simon - 11 January 2013

Why on Earth does anyone believe that the UK’s economic situation is better that the Eurozone? Add if the only thing you can say is ‘we’re not in the Euro’, that is a strong indication of the problems we are in.

Afterall, if the bank/financial sector recklessness got us into this economic mess, where do people think many of them are?

Comment by Nick - 01 February 2013

“With so many UK consumers dependent on low mortgage rates this would be a disaster for many domestic households”
It’s a disaster for very many more households who have negative returns on savings, low pension payouts and high food inflation; a direct attack on the responsible citizens of which there are many millions more than the over-borrowed who ‘bought’ houses they could not afford.
“Higher interest rates would therefore tend to depress UK house prices”
GOOD! The economy will not recover until prices have dropped 50% or more.

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