Exchange rate comparison
If October was a scary month for financial markets, November was hardly any more relaxing. For Sterling's supporters there can be no doubt that it was worse, with the Pound losing twelve cents against the US Dollar and ten against the Euro.
A deep and long recession forecast by some
With the British government injecting capital into the banks and generally doling out cash to preserve the financial sector, investors began to wonder where all the money would be coming from. And they started to wonder who would be providing it. A handful of analysts, including the World Bank, were predicting that Britain would suffer the deepest and longest recession in the developed world. That being the case, there was no way the government would be able to recoup its handouts through taxation. |
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More money going out and less money coming in
Recession means reduced profits for companies and a higher level of unemployment. That means less corporation tax and less income tax coming in, as well as more money going out in benefits. Nor could the government finance its largesse out of its reserves. Britain has been a borrower since the late 17th century and there is certainly no money in the kitty nowadays for generosity on the scale that Downing Street has in mind now.
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Borrow money or print money
There are two other ways for the government to finance the bail-outs. It can borrow the money against future tax receipts or it can just print the money. The second of these two is the nuclear option. Printing money means devaluation. With no change in the supply of goods, land or labour, to create money simply means making more money available to buy the same assets or services. Double the money supply and you double the price of everything. Ask Robert Mugabe. Even he should have spotted the flaw in his strategy by now.
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Government bonds or gilts
So the government must borrow the cash. It has done so for generations by selling bonds or "gilts" to investors looking for a safe home for their money. They buy the gilts, collect the annual built-in interest payment and get their money back when the gilt matures after 20 years or whatever. The United States raises vast amounts of cash this way. It will need to raise even more now that it has promised well over $1,000,000,000,000 to rescue its banks and financial institutions.
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US Treasury Bonds safer than UK Government Gilts?
Such is the status of the US government bond market that Washington ought to have no great problem selling all those bonds. Everybody sees US Treasury Bonds as a super-safe haven for their money. The same is not necessarily true of UK Government Gilts. It is not that Britain is seen as intrinsically more dodgy than the States or Germany or France, more that its creditworthiness is variable. If you want a £100,000 mortgage the bank will probably offer it without hesitation. If you want £100,000,000 the bank will hesitate. This is what investors fear about Britain. It will need to borrow more money than investors are ready to provide.
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Investors cautious
A deep, long-lasting, recession and a heavy borrowing demand are not the sort of things that have investors beating down the door. They are the sort of things that make investors look elsewhere. And that is what was happening in November to Sterling. Is the Pound a basket case? No. Are investors worried that it might become one? Absolutely.
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Buying Euros
For the time being we have to deal with the reality of a struggling Pound. The cautious strategy for buyers of property in France is to buy straightaway half of whatever Euros they need. Do it using a forward transaction and only a percentage deposit is necessary to set up the arrangement. (Currency exchange options which save you money.) If price certainty is essential the bunker approach is to buy the whole lot now. Bear in mind that buying everything is just as speculative as buying none: any Sterling recovery would be of no benefit. (Currency Exchange - Buying Euros at the Best Rates - Your FAQs.)
Additional articles which may be of interest:
Advantages of using a currency broker or foreign exchange specialist
Glossary of terms used in currency exchange
Feedback on currency brokers or foreign exchange dealers
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About the author
The information in this article has been supplied by the currency broker Moneycorp. For further advice on currency exchange and money markets, call Moneycorp today on +44 (0)20 7589 3000. Alternatively go to www.moneycorp.com where you can open a free, no obligation Trading Facility. Make your money go further!
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