The financial markets came to remind a basic truth in the United Kingdom, Monday September 26: even the developed countries do not benefit eternally from a blank check to finance themselves. In the early morning, with only Asian markets open after the weekend, the warning came: the pound fell just below 1.04 to the dollar, simply to its multi-centennial low, before recovering slightly during the day.
Against the euro, itself very low, the fall is less marked, but real: – 7% since the beginning of August. As for British government bonds, they suddenly stretched: a ten-year loan rose from 3.5% on Friday morning to 4.3% on Monday evening. The United Kingdom now finances itself at almost the same price as Italy, which is at 4.5%, despite the electoral victory of a post-fascist party and a much heavier debt.
It is not yet a major financial crisis, but the warning is serious. At issue: the budget presented on Friday, September 23. This vast recovery plan freezes energy prices and offers the biggest tax cut for fifty years, without any effort being made to try to find a source of financing.
Strange debate
“Markets seem to have doubts about the credibility of the UK’s long-term fiscal plan”explains Andrew Goodwin, of Oxford Economics. “This is exactly how not to organize and present a fiscal expansionadds on Twitter Olivier Blanchard, the former chief economist of the International Monetary Fund. While we were worried about Italy, it was the United Kingdom that invited itself. We are lucky that he is not in the euro…”
A strange debate has started among economists for a few months: has the United Kingdom, the world’s fifth largest economy, become a kind of emerging country? “It’s not when it comes to its per capita income and wealth, but it has huge twin deficits [de la balance courante et du budget] that make the discussion of whether it acts like an emerging country worthwhile”, asserts Kaspar Hense, portfolio manager at BlueBay, an asset manager. And to think that a century ago the country was the first world power, holder of reserve currency…
XIXe century. The sun never sets on the British Empire. A third of world trade is with the United Kingdom and the pound sterling is the queen of world currencies, used as a reserve throughout the world. “Having the reserve currency means [qu’un pays] can pay for it [qu’il veut] by issuing checks that no one ever asks to cash. People see these checks as a store of value or a source of liquidity. That means you can spend a lot more than everyone else.”, explained Avinash Persaud, professor emeritus at Gresham College, during a fascinating conference in 2011. At the time, the pound sterling was worth 5 dollars, five times more than today.
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