Cameron Evokes Black Wednesday as Pound Weakens 7%: U.K. CreditGonzalo Vina and Lucy Meakin
The pound is bearing the brunt of a loss of confidence in the economic policies of U.K. Prime Minister David Cameron.
Sterling has weakened around 7 percent against the dollar this year. In the week through Sept. 16, 1992, when investor George Soros earned $1 billion by helping to force the pound out of the exchange-rate system that preceded the euro, sterling dropped by 9.5 percent. Black Wednesday, as the day became known, damaged the Conservatives’ reputation for economic competence. Economists and investors say a similar judgment faces the present Tory-led government unless it gets the economy moving. Gilts are among the world’s worst performers this year.
Chancellor of the Exchequer George Osborne, delivering his annual budget to Parliament today, said his fiscal watchdog had cut its 2013 U.K. growth forecast in half to 0.6 percent. Britain has recovered only half of the output lost in the 2008-2009 recession, and the country forfeited its top credit rating at Moody’s Investors Service on Feb. 22. Output in the U.S. is back above its pre-slump peak and the recovery is gaining pace.
“The chancellor’s policy is bankrupt -- he is going to have to face that,” Robert Skidelsky, a member of the upper chamber of Parliament without party affiliation and biographer of John Maynard Keynes, said in a phone interview on March 14. “The economy is not growing, the pound will go on slipping and we will lose further credit ratings.”
When Cameron and Osborne took office in May 2010, they predicted the economy would grow more than 5 percent over the next two years, a budget deficit equal to 11 percent of gross domestic product would fall to 2 percent by April 2015 and the U.K. would keep its top credit rating. Instead, output rose 1.1 percent, the deficit is still 8 percent of GDP and analysts say Fitch Ratings and Standard & Poor’s will follow Moody’s in downgrading Britain’s credit score after today’s budget.
Credit-default swaps insuring gilts rose 66.5 percent from a more than four-year low of 26 basis points on Nov. 1, the most among 67 governments tracked by Bloomberg. The premium investors demand to hold gilts rather than German bunds has increased almost fivefold since August to 48 basis points.
Constrained by his self-imposed austerity program, Cameron is relying on the Bank of England to revive the economy. The central bank has bought 375 billion pounds ($564 billion) of government bonds since March 2009 as part of its quantitative-easing program and kept its benchmark interest rate at a record low of 0.5 percent.
As Mark Carney prepares to take over as Bank of England governor in July, Osborne said today he is giving policy makers more flexibility to meet a 2 percent inflation target amid shocks to the economy.
The current governor, Mervyn King, and two other officials maintained their push for more stimulus when the Monetary Policy Committee met this month, minutes published today showed. They were defeated by the majority who said more bond purchases could fan inflation expectations and push the pound lower. The 10-year breakeven rate, a gauge of expectations of inflation derived from a difference in yield between regular and index-linked bonds, climbed to 3.37 percentage points on March 14, the most since September 2008.
“The fiscal side of things certainly plays in and is impacting via the monetary policy route because that has to do more of the work,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, said by phone on March 18. “That is putting the pound under pressure.”
Sterling has lost 4.5 percent since the end of 2012, the worst performer after the yen, according to Bloomberg Correlation-Weighted Indexes. The pound has had its worst opening two months of the year since 1985 against the dollar. It tumbled to a 2 1/2-year low of $1.4832 on March 12 and traded at $1.5164 as of 2:54 p.m. London time.
Gilts fell 0.1 percent in pounds and 6.6 percent in dollars this year, among the most of 26 indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies. The yield on the benchmark 10-year gilt will rise to 2.46 percent by year-end compared with 1.87 percent today, according to the weighted average in a Bloomberg News survey.
Black Wednesday broke Britain’s two-year-old peg to the deutschmark as the Treasury failed to defend the pound against short sellers such as Soros who bet sterling was overvalued in the European Exchange Rate Mechanism, a euro precursor that required members to keep currencies within trading bands.
Sterling dropped 12 percent against the German currency between Sept. 15, 1992 and the end of that year, and by 19 percent against the dollar. While the decline aided Britain’s recovery from recession by making exports more competitive, the ERM crisis shattered public confidence in John Major’s government. In the 1997 election, the Conservatives lost to Tony Blair’s Labour Party, which retained power until 2010.
The pressure on the pound this year underlines the challenges facing Cameron, 46, who witnessed the events of Black Wednesday as a 25 year-old adviser to then Chancellor of the Exchequer Norman Lamont.
A 0.3 percent contraction in the fourth quarter of 2012 left the economy 3 percent smaller than it was in the first quarter of 2008. Only Italy has had a worst performance among leading industrial nations. By contrast, output in the U.S. was 2.5 percent above its previous peak in the fourth quarter of 2007. The American economy will grow 1.9 percent this year, while Britain’s will expand 0.9 percent, median forecasts in a Bloomberg survey show.
The chancellor received more negative news when ONS data today showed jobless claims fell less than economists forecast in February and a wider measure of unemployment rose for the first time in a year as the number of young people looking for work climbed. Wages rose 1.2 percent in the three months through January, the least since 2009, intensifying the pressure on household budgets at a time when inflation is at 2.8 percent and forecast by the Bank of England to accelerate in coming months.
The economy’s plight is threatening to cost the Conservatives the next general election in 2015, with recent opinion polls showing the Tories about 10 points behind Labour.
Osborne should be replaced as finance minister, according to 44 percent of people questioned by ComRes Ltd. between March 15 and March 17. Sixty-one percent said Britain was heading for another recession and trust in Osborne to run the economy stood at minus 40, a drop of 13 percentage points from a year earlier. The poll of 2,032 adults was broadcast by ITV News yesterday.
Morgan Stanley cut its year-end forecast for sterling by 8.9 percent on March 18. The bank estimates the pound will trade at a 33-month low of $1.43, from a previous forecast of $1.57. The median estimate compiled by Bloomberg is for sterling to end the year at $1.52, compared with a forecast of $1.60 at the end of December.
“The poor position of the fiscal backdrop, the failure of the government to be hitting all of its fiscal targets and the fact that growth prospects have disappointed are all part of the reason why sterling is weaker,” Jane Foley, a senior foreign-exchange strategist at Rabobank International in London, said in a phone interview on March 15. Rabobank cut its second quarter forecast by 4.5 percent to $1.49 to $1.56 on March 8.