FTSE in meltdown, and now the pound crashes
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Associate Editor
David Stevenson Oct 24, 2008
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The pound suffered the biggest fall against the US dollar in 37 years.
Stock market crashes, banks going bust, recession… how much else can go wrong?
Answer: plenty. Britain now has a currency crisis on its hands, too.
This morning, the pound tumbled below $1.53 against the dollar in its biggest drop in at least 37 years. That's even worse than on so-called 'Black Wednesday' in September 1992, when the UK was dumped out of Europe's Exchange Rate Mechanism, the precursor to the euro.
What's done the damage? Everyone knew we were heading for recession by now. But what the currency markets weren't expecting was today's news that Britain's GDP - gross domestic product, otherwise known as annual output – shrank by 0.5% in the three months to September, according to data from the Office for National Statistics.
Not only was this the first time in 16 years that the economy has contracted, it was a whole lot worse than expected. The collective thoughts of the experts were for 'just' a 0.2% drop.
"It's pretty bleak and it looks ever more likely that we're going to have a recession that resembles what we saw in the early 1990s", said Ross Walker at Royal Bank of Scotland, "we'll see another half-point cut at the Bank of England's next meeting, if not sooner."
The stock market has gone into meltdown mode - OK, the phrase has been a bit over-used, but today it's no exaggeration – with an 8% tumble. But there again, so have virtually all the other markets round the world. At time of writing, Germany is down 9.6%, as was Japan overnight.
But the GDP news has also sent currency traders into tilt. Sterling has been falling for several weeks. Now it's turning into a rout.
"This is once-in-a-lifetime stuff, we're all sat under our desks with tin hats on", says Neil Mellor at Bank of New York Mellon Corp, "the UK is in the first step toward a recession and the dollar's 'bid' (i.e. it's rising) because of repatriation flows".
In other words, even if things aren't too great in the States, people are turning to the greenback as a sort of safe haven. And they are dumping sterling like crazy.
What does this now mean for Britain?
Back in 1992, 'Black Wednesday' turned out, eventually, to be good news for the country. When George Soros & Co. helped to drive the pound out of Europe's Exchange Rate Mechanism - in which sterling was linked to the deutschmark - the pound lost 10% of its value within a week. First impressions were that the UK was in real trouble. But later on, it turned out all right. Interest rates were cut, which helped the economy to recover.
Our exporters were boosted, and inflation was declining round the world, so a falling currency – which normally pushes up prices of imported goods - didn't matter too much. Within two years, the pound had recovered.
This time though, we aren't likely to be so lucky. Now the whole planet is in a complete financial mess, and the weakest – like Iceland, and Argentina – are going to the wall. So we can't rely on growth in other countries helping us out.
And it seems that Britain has now been targeted as one of the next big credit crunch losers. With our state coffers facing a "black hole" in tax revenue calculations as big as £125bn, according to the Evening Standard, in the event of a recession until 2010, the government will have to borrow even more to make up the difference.
Yes, interest rates may fall, but if the pound is plunging, that borrowing is going to be made a whole lot harder. And, of course, our economy will be getting weaker by the day.
Back in 1976, we needed to be bailed out by the IMF. Let's hope things don't get so bad this time…
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