Sterling Crisis Looms as U.K. Unraveling Points to Budget Cuts

Rochdale_Pioneers

Currencies devalue and reinflate when left to float. As has been pointing out the devaluation - and recent revaluation - of Sterling has been relatively gentle compared to some of the big shock events of the past.

For a currency run look at September 1992. Big investors bet that Sterling will fall, masses of currency dumped onto the market forcing the price down, BoE frantically buys currency to keep the price up, within a few hours the price is down and we're £10bn out of pocket.

If the speculators decide the pound is overvalued vs the competition then a run is possible. I think this is less likely now for two reasons - its already had a correction downwards, and other currencies are as depressed as ours - there is no safe haven investors can run to.

And ultimately thats the big difference this time. We're not in a recession on our own - investors can't cut and run with any guarantee that anywhere else if safer.

Generali

StevieJ wrote: »

How goes it Gen? where are you up to in the job stakes? I am a little confused.

I've got 2 jobs right now - I'm helping looking after the finances of a small Sydney private hospital and doing some economics tutoring for a local offshoot of a university. I'm also about to start advertising my services as an HSC (like A' level) economics private tutor. Tutoring is pretty lucrative as it turns out!

I'm looking at starting a CPA (like CIMA in the UK) and going into running hospitals. It looks like fun and relatively low stress. The tutoring will keep the Generali finances in order in the meantime.

The mortgage people want me to go back part time but I think I'll stick with the tutoring TBH. We'll see.

Oh and I got a job offer today to be a train driver which I don't think I'll take up.

In other news, I'm looking at the feasibilty of cycling from Sydney to Darwin in Decmeber 2010(!). I suspect it'll be a no go but I'm looking into it. I think the next big cycling trip will be Sydney to Robertson (a cheese making centre - yum!) Oh and I signed up to do dry July:

https://www.dryjuly.com/profiles/generali

Feel free to sponsor me or even better to buy me a Golden Ticket! I've not had a drink in almost 20 hours and the pressure is starting to show.

purch

If not how much would it have to lose in value for it to become a run?

I would use time as the measure, more than value.

A 25% drop in a week or 10 days would be a run, a similar drop over a few months would not be.

But of course that is just my opinion, and others would no doubt see if differently.

purch

BoE frantically buys currency to keep the price up, within a few hours the price is down and we're £10bn out of pocket

.....plus the hilarity of Norman 'Shuffler' Lamont (the worst Chancellor in the history of worst Chancellors ) standing in front of the Treasury at 7pm and telling the world that we surrender from the fight we shouldn't have joined in the first place, and the 15% base rate :eek: he had announced at 4pm would not now be happening !!!!!

Probably the most embarrassing moment in the history of the Treasury.

michaels

What would a sharp drop in the currency bring?

Potentially Iceland type problems if our banks with their massive balance sheets have liabilities in other currencies and assets in sterling.

Potentially Govt funding difficulties if investors seeing sterling as a weak and falling or simply more volatile currency demand additional returns to compensate for the risk

Potentially high inflation - the previous devaluation coincided with a fall in global prices so little inflation was imported we just didn't see the reductions in prices that we would have done otherwise and was probably a good thing. This is less likely to be the case if there were big falls in sterling now so inflation would rise and potentially real incomes wbecome squeezed as the price of imported essentials (food, petrrol, gas & electric) rise sharply.

Potentially a short term balance of payments crisis as the relative price of imports to exports rises as we are currently a net importer and adjustment takes time and pain.

Perhaps Generali could add to the list?

Generali

purch wrote: »

.....plus the hilarity of Norman 'Shuffler' Lamont (the worst Chancellor in the history of worst Chancellors ) standing in front of the Treasury at 7pm and telling the world that we surrender from the fight we shouldn't have joined in the first place, and the 15% base rate :eek: he had announced at 4pm would not now be happening !!!!!

Probably the most embarrassing moment in the history of the Treasury.

I'd say that the exit from the Gold Standard was a greater humiliation given the massive costs exacted from the British economy to return to Gold at the old rate.

The ERM exit was certainly right up there though.

TBH, all those devaluations from fixed rates are humiliating, mostly because of the lies the politicians tell in an attempt to defend the currency. Gnomes of Zurich anyone?

inspector_monkfish

ad9898 wrote: »

If this guy's thoughts come to fruition, my thoughts on a housing market trough today in another thread would be blown away, yet I reckon less than 1% of the country has any idea about this issue.



I thought this quote was particularly alarming.

http://www.bloomberg.com/apps/news?pid=20601102&sid=aptnrMueIerQ

why is there always so much concern about the british banks, when there are a whole lot of European Banks in much worse situations?

---

But before Europe's financial-services industry pats itself too hard on the on the back, bankers and investors may want to heed the sobering analysis released recently by the European Central Bank (ECB). Analysts at the ECB, which oversees the 16-country bloc that uses the euro, forecast that euro-zone banks could still record a further €283 billion ($398 billion) in writedowns by the end of next year, predominantly from defaulting corporate and consumer loans.

Most of the problems for Europe's banks are linked to struggling economies. Although financial markets have largely recovered, the European Commission still expects the European Union's gross domestic product to contract by 4% this year and a subsequent 0.1% in 2010. The broader downturn has hit consumer spending and led to rising loan-default rates, particularly among small and midsize businesses. The expected jump in defaults also has raised concerns that major banks, such as Germany's Deutsche Bank (DB) and Spain's BBVA (BBV), may be undercapitalized and will need to raise more money from investors to cover their exposure.

http://www.businessweek.com/globalbiz/content/jun2009/gb20090629_039072.htm

inspector_monkfish

not to mention the US Banks....

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCbHA.m7rikc

Generali

michaels wrote: »

What would a sharp drop in the currency bring?

Potentially Iceland type problems if our banks with their massive balance sheets have liabilities in other currencies and assets in sterling.

Potentially Govt funding difficulties if investors seeing sterling as a weak and falling or simply more volatile currency demand additional returns to compensate for the risk

Potentially high inflation - the previous devaluation coincided with a fall in global prices so little inflation was imported we just didn't see the reductions in prices that we would have done otherwise and was probably a good thing. This is less likely to be the case if there were big falls in sterling now so inflation would rise and potentially real incomes wbecome squeezed as the price of imported essentials (food, petrrol, gas & electric) rise sharply.

Potentially a short term balance of payments crisis as the relative price of imports to exports rises as we are currently a net importer and adjustment takes time and pain.

Perhaps Generali could add to the list?

I think you got most of it. Higher interest rates would be the big problem.

purch

not to mention the US Banks....

Well don't mention them then !!!!!