More sterling dross
A three day plunge in the first half of this week saw the value of the British pound fall by some 10 cents against the US dollar, to around 1.36 – its lowest level since 2001. Against the yen, sterling hit 119, a rate it last saw in 1971, when the Japanese currency began a dramatic and decade-long climb in value.
This latest lurch downwards was in no way surprising. The immediate trigger was the official announcement of another huge rescue package for the British banking system, several times bigger than the one launched only a few months ago. If the first one cost the British taxpayer nearly $70 billion, the second one will cost upwards of $200 billion. But the announcement of the second is also, ipso facto and inter alia, an admission of the utter failure of the first.
Ipso facto – because if the first one had done the job, there would be no need for a second, but also because the strategy underlying the second intervention is quite different from that of the first. Round one saw Her Majesty’s Treasury buy chunks of equity in several leading banks, notably the Royal Bank of Scotland (RBS). This initiative was hailed across the Atlantic as illustrating the correct approach to use in addressing the escalating crisis in the global banking system. The US Treasury duly reinvented its Troubled Asset Relief Program (TARP) so that the first $350bn allotted by Congress was directed to buying equity in banks, rather than buying the bank’s ‘troubled assets’ (a.k.a. toxic waste) as had been the original intention. Now, in the British round two, they intend to buy troubled assets from their banks – implying that buying the banks’ equity was a waste of time and money.
Inter alia – because the implications of the latest government intervention in the banking sector stretch far beyond that sector’s confines. The intervention was effectively imposed upon the government by the ongoing collapse in the prices of the British banks’ shares, which reduced their market capitalization values to levels last seen in the 1990s (or even the 1980s, in some cases) – levels far below those prevailing last autumn, prior to the previous intervention. As the $41 billion loss announced by RBS for 2008 – the largest in British corporate history -proved, the banks are losing money faster than they can raise fresh capital. Quite unsurprisingly, no-one in the private sector, not even the ‘Middle Eastern investors’ who bailed out Barclays a few months ago, wants to throw any more money down the black hole of British banking. That leaves only one source of salvation – the Treasury, using current and future taxpayers’ money.
But more and more experts outside of government are convinced that this effort is as futile as it is wasteful. The banks will not stop losing money in the foresaeeable future, because their reckless financing of the British real-estate boom has come back to haunt them. Nor will they restart lending money, as the Treasury demands they do, because they no longer have any incentive to do so, especially when the Bank of England is urging them to increase their capital and reduce their risk-taking. The rapid descent of the British economy into a recession that even the Chancellor of the Exchequer has identified as the worst in decades means that the banks are right – from their narrow viewpoint — to have belatedly been converted to prudence. However, their refusal to lend makes survival even harder for businesses of every size and sector.
With Britain’s economy falling off a cliff and its banking sector melting down, the renewed slide in sterling’s value should be seen as understandable and justified, rather than disproportionate. Technical analysts are looking to the 1.29 level as their next target, but on the horizon looms the historic low of 1.03 pounds to the dollar hit in 1985. For many people today, the very idea of sterling-dollar parity seems ludicrous, as indeed it seemed 24 years ago, when traders in the City of London were preparing ‘parity parties’.
Yet if we have learnt anything from the last two years, it is surely that no scenario is too wild to be dismissed as impossible. Much more extraordinary things have happened, in the markets and in the real economy, than something as humdrum as a currency swinging to a seemingly absurd level for a prolonged period of time. That the market is capable of anything, including and especially of being massively and consistently wrong, has been proven beyond all doubt. Consequently, the many readers of this paper who have been and continue to be victims of the slump in sterling might want to consider that not only might the worst not be behind them, but also that much worse still may lie ahead.