“The British pound is in danger”. George Saravelos, an analyst at Deutsche Bank, made no secret of his concerns about the British currency on Friday. It is not for nothing that the British currency has fallen by more than 7% in 10 days, a movement of a scale that is extremely rare in the foreign exchange market. On Friday, it fell below the symbolic threshold of $ 1.10 and fell to $ 1.0863 for the first time since 1985, not far from the absolute record set that year, which was $ 1.0520. This is because Budget announcements in London are seen by investors as worrying about the health of public finances, while the country is in recession, according to the Bank of England. Since the beginning of the year, the pound has lost almost 20% of its value against the dollar.
The decline was even more worrying in his eyes because the borrowing rate for British debts increased. This is “very rare in a developed economy,” he said. On Friday, moments after Liz Truss’s government announced a costly economic stimulus package (over £ 100 billion), interest rates on ten-year loans in the UK had already fallen above 3.8%, a level not seen since 2011. The price of British government bonds rose to 3.84% during the session. At the beginning of september, the return was only 2.8%, and 2021 ended with less than 1%.
Debt on an ‘unsustainable level’
A boom that reflects doubts about London’s ability to finance these measures. The combination of massive tax cuts and aid, which will force the UK to borrow another £ 72 billion from the markets, is raising fears of the worst public finances. According to the Institute for Budget Studies (IFS), Truss’s plan threatens to take the debt on an “unsustainable path”. The prospect may scare off investors.
“This is very damaging to the UK’s reputation as a fiscally responsible country,” said Andrew Sentins, a former member of the Bank of England.
The same story for George Saravelos of Deursche Bank: “We are concerned that investor confidence in the UK is deteriorating rapidly”.
