Sterling is being sold across the board. At lunchtime it was down almost 2 per cent against the currencies of Britain’s main trading partners. There are a bunch of technical reasons why it seems to be in freefall. Figures from the Chicago Mercantile Exchange suggest traders are building up short positions in sterling, the news that Prudential has agreed to buy the Asian operations of AIG insurance group for $35.5bn will create a significant new demand for foreign currency, and the FT’s story today that gilts are trading as if it has already lost the prized AAA_rated status have all put the skids Britain’s currency.
But the big concern in the markets is the chance of a hung Parliament after weekend opinion polls put the Conservative lead over Labour at only 2 per cent. On a uniform swing, this would not be far from sufficient for a majority Conservative government and would indicate a minority Labour administration is most likely. The fear is that such a government would be weak and indecisive in reducing the budget deficit, leading to further economic chaos.
While chaos is certainly possible, my fear about a hung parliament is not that consolidation is too slow, but rather the opposite. With the threat of another election hanging over politicians, the ever-present danger of political parties being blamed for fraying market confidence in Britain seems most likely to lead to extremely zealous budgetary tightening. If you think that is exactly what Britain needs, you should be delighted by today’s market nervousness - it is an appetiser for the real fears that would materialise in an inconclusive election.
But it you think, like me, that we need to be very careful about immediate additional fiscal tightening, then a weak government with a need to show its strength through forcing through an extremely tight budget is quite a consolidation worry.
