Monday, Jul 06, 2009
Sterling fears
Wallstreet Journal: Banks Press UK To Issue Foreign Currency Debt
Banks want the BoE to issue foreign currency debt because they don't think there will be sufficient demand for sterling denominated debt in the future. This is gloomy news for sterling. The UK obviously doesn't use foreign currencies to pay for government expenditure, so by borrowing in a foreign currency would require sale of that foreign currency in exchange for sterling. Put it another way, foreign holders of sterling don't trust that the pound will keep its value.
Posted by stillthinking @ 03:39 PM (720 views) Add Comment
3 Comments
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1. stillthinking said...
My opinion is that this is two birds with one stone. Foreign lenders remove the risk of devaluation policies, such as the existing 25% devaluation, lets not forget, all foreign gilt investors lost that already. -and- they create a large buyer of sterling in the marketplace.
So a possible conclusion is that now government is weak because it -has- to extend borrowing, there is possible blackmail for those looking to get out of sterling positions at a better price than otherwise.
You can blackmail people who must borrow on any terms, look at banks with domestic mortgage holders, they openly announce they want to be as uncompetitive as possible.
The banks seem to have the upper hand so further devaluation seems to be off the menu. The pesky banks don't seem to realise that we aren't following a sound money policy because we are wriggling on the hook.... There are ramifications to this. Our reflation policies would be stopped, basically the BoE would be reflating euros or whatever instead, and we carry on our deflationary way. Instead of the UK government being the borrower of last resort, the UK would be the international borrower of last resort.
2. quiet guy said...
Here's a link without the annoying email registration:
http://www.beurs.nl/nieuws/artikel.php?id=295927&taal=US
I'm surprised this isn't getting more comments. Taking on sovereign debt in a foreign currency is an implicit acknowledgement of the weakness of the pound as well as a huge gamble; a UK currency crisis while we hold debts in euros could be devastating to us.
It's no secret that Germany would like to take the role of leading financial services provider from london and getting hooked on euro debt might be a stepping stone to that end. As Stillthinking says, this could give the ECB some leverage over us. Worrying.
3. japanese uncle said...
It increasingly looks similar to Iceland.