Pound Slumps Over Fears Of Election Stalemate

(Telegraph) – THE VALUE OF THE POUND fell sharply on Monday as financial markets took fright at the growing possibility of a hung parliament.

Sterling fell by almost 3 cents, ending the day below $1.50 for the first time in nearly a year amid fears that Britain will be left with a weak government unable to cut spending and balance the budget.

Fears that no party would gain an overall Commons majority led to warnings that the pound was “staring into the abyss” and would fall further still. Figures suggest that traders are placing huge bets on more declines.

The markets’ growing fears about Britain’s economic prospects follow a slide in the Conservatives’ opinion poll lead over Labour. Recent surveys have put the Tory lead as low as two percentage points.

An Ipsos MORI poll last week suggested that Labour could cling on as the biggest party in the Commons.

Within minutes of London trading starting on Monday, the pound’s value began to slide.

At one point, it fell as low as $1.4781, the lowest level since May 1 last year. It rose slightly to finish at $1.4939 at 4pm — a fall of 2.85 cents. The slide also showed in the euro, which was worth 90.22p. Traders are unlikely to be reassured by a ComRes/Independent poll today that puts the Tory lead at five points, suggesting Labour would still have the most MPs but fall short of a majority.

Audrey Childe-Freeman, of Brown Brothers Harriman, a New York bank, said: “The risk of a hung parliament is increasing. You will need a government with a strong majority to push ahead with reforms that the UK needs.”

Simon Derrick, a currency strategist at Bank of New York Mellon, said: “The likelihood that we’re going to move to a rapid lessening of the deficit is being taken away.”

Mark O’Sullivan, of Currencies Direct, said: “As the pound drops, the currency markets appear to have run out of patience. Sterling could be staring over the edge of the abyss.”

Some investors fear that a hung parliament and a minority government would lead international credit ratings agencies to downgrade Britain’s status, making it more expensive to raise funds. A weak pound also drives up the cost of imports.

One international bank, Bank of Tokyo-Mitsubishi, predicted the pound would fall towards $1.40 this year.

A bank spokesman, Lee Hardman, said in a report that the worst outcome for the pound would be Labour clinging to power as a minority government because of the party’s high-spending agenda.

He wrote: “A Labour victory would further damage the fiscal credibility of the UK given their reputation for loose fiscal policy.”

Some currency traders also believe that the pound will come under greater threat if Greece’s crisis-stricken government is bailed out by other European Union members.

If Greece is rescued, some investors believe Britain is the European economy most exposed to market concerns about government deficits.

Gordon Brown angrily disputes comparisons between the UK and Greece, but independent analysts point out that the UK budget deficit this year is forecast to be 12.8 per cent of gross domestic product, comparable to Greece’s.

Downing Street and the Treasury refused to comment on the market movements. Privately, senior government officials have been contacting City banks to reassure them about plans to cut the deficit.

In a City speech last night, Lord Mandelson, the Business Secretary, accepted that Britain was “now unavoidably in significant debt”. But he said Labour was right to put off spending cuts until next year.

The Tories declined to comment. But the party has warned that the City will react badly unless they gain a substantial majority.

As the pound falls, the interest rate on gilts, British government bonds, is rising. That will ultimately push up the interest rates for loans.

Data from the Bank of England also showed that foreign investors sold off the most British bonds for nine months in January. Foreign investors sold £1.5 billion of gilts more than they bought during January, the figures showed.

On Tuesday the Treasury will sell off a new tranche of gilts. Investors said the strength of demand for those bonds would be a key indicator of market confidence in Britain.