U.K. 1976 Crisis Protagonists Evoke Lessons for Brexit Worldby
Former IMF head recalls bailout, says it could happen again
Comments come as EU exit spurs fears over current-account gap
A falling pound. An uncertain economic backdrop. Twin budget and trade deficits. Nervous overseas investors. A government with a small majority.
Feeling a sense of deja vu?
That was the picture in 1976 when Britain was forced to take a $3.9 billion bailout from the International Monetary Fund following more than a year of pressure on sterling. While the situation isn’t as dire now, there are echoes today in the concerns about the willingness of foreign investors to keep funding a large current-account deficit as Britain prepares to leave the European Union.
The world can learn parallels from financial upsets such as Britain’s emergency loan, and people shouldn’t completely rule out a rerun of the debacle, according to Johannes Witteveen, who helped negotiate the U.K. loan four decades ago as managing director of the Washington-based lender.
“The situation is rather different now,” the 95-year-old said in an interview in London. “But whether it will happen again nobody can tell you. It could be possible.”
Witteveen’s recollections came at an event Thursday that brought together current officials and those involved at the time. It was held to launch a book about the crisis, which culminated 40 years ago this week when James Callaghan’s Labour government agreed to accept the IMF’s demands for deep spending cuts in return for the financial lifeline.
The episode became a defining moment in British political history, marking a policy shift away from fiscal spending toward controlling inflation. Margaret Thatcher saw it as a national disgrace. It was cited in 2010 by then Chancellor of the Exchequer George Osborne as he stressed the importance of tackling a budget shortfall of 10 percent of GDP, almost double that in 1976.
The author of “When Britain Went Bust,” King’s College London professor, Richard Roberts, said the sharp decline in sterling this year has parallels with the market turmoil seen four decades ago. The pound fell 28 percent against the dollar during 1975 and 1976. It’s dropped 16 percent since the June 23 Brexit vote, at one point reaching a three-decade low. Partly fueling the drop are concerns about a current-account deficit running at more than 5 percent of GDP.
“Britain’s use of currency depreciation as an economic solution is a notable long-term trait,” Roberts said during the debate organized by the Official Monetary and Financial Institutions Forum, which published his book. “Britain appears to have an ingrained propensity for living beyond its means, rectified by occasional adjustments. As with 1976, the recent Brexit depreciation is unlikely to be the last.”
Still, another appeal for IMF assistance seems “almost inconceivable,” he said.
Witteveen said if there was a bailout now, the political stakes would be far higher and opposition to any loan conditions would be fiercer than that he encountered when he led the IMF team sent to London.
A big difference was the severe sensitivity in the 1970s about every month’s public borrowing figures and the level of sterling, according to Bernard Donoughue, who was a senior policy adviser to Callaghan.
“The worries about our debt levels then were very acute and very immediate,” said Donoughue, 82. “My feeling is that other than among the very professional class that’s no longer the case. That may be dangerous.”
One element that does link now and 1976 is sentiment, according to several speakers.
“I personally felt the whole issue was one of confidence,” said David Owen, a minister at the Foreign Office in 1976 and later foreign secretary. More recently, “although the economic news has been remarkably better” than forecast ahead of the Brexit vote, “we shouldn’t rely on that too much,” said Owen, 78.
According to Gerard Lyons, a pro-Brexit economist and chief economic strategist at Netwealth Investments Ltd., Britain should be more confident about the outlook.
“Currencies are shock absorbers,” Lyons said. “What we really need now is to recognize that with any economy, the outlook depends on the interaction between the fundamentals, policy and confidence, and we should be incredibly positive about what lies ahead.”
For Roberts, one specific lesson from 1976 is that currency crises often lead to the incumbent government being punished at elections. “There’s some kind of a warning” for Prime Minister Theresa May in that, he said.