Posts Tagged ‘International Monetary Fund’

Sterling – is it worth it?

Sunday, September 20th, 2009
And the question is

Image by Steve Punter via Flickr

As Robert Peston points out on his blog, the UK is currently caught in a vicious cycle.

UK banks owe billions to overseas lenders; lenders confidence in the UK banks is wavering increasing the likelihood of them demanding their money back; this is causing the value of sterling to fall, as the government, already massively in debt, is effectively guaranteeing repayment; sterling’s fall is in turn increasing the value of the bank/governments’ debts further reducing confidence in the banks and the UK.

Having an independent currency was supposed to have the benefit of allowing gradual devaluation to boost international competitiveness. Unfortunately as we are so in debt to the rest of the world, it seems to be driving us into a potentially nasty scenario where the UK can not pay its debts. Think Russia in the 1990s or Argentina in the early 2000s. Default leads to a sudden sharp fall in the value of the currency which then leads to massive inflation, as the price of imported goods and services soar. This feeds through to wage demands and all the knock on effects of being caught in an inflationary economy.

How long will it be until Gordon is on the phone to the IMF? Would this have happened if we were part of the Euro?

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Are we running out of money or is this crisis “totally different” to the 1976 IMF bail out

Friday, January 23rd, 2009
IMF Headquarters, Washington, DC.

Image via Wikipedia

In a speech to the Demos think-tank in London yesterday David Cameron suggested that the UK will have to go begging to the IMF because of Gordon Brown‘s borrowing. “If we continue on Labour’s path of fiscal irresponsibility, at some point – and it could be very soon – the money will simply run out.”

Gordon Brown countered on BBC Radio 4′s Today programme this morning that the current crisis was “totally different” to anything seen before, because it was not driven by high inflation and wages.

So, who to believe?

As I said in my previous post at the beginning of the week, the danger is in the ballooning government debt and the eventual risk that the UK can not raise adequate additional funds in the bond market as international markets loose faith in sterling.

The UK may have a much lower national debt as a % of GDP than many other countries, however, the figures exclude the liabilities relating to the government bank guarantees and the fact that the government has effectively stated that it will not let any of the banks go bust. Their liabilities are therefore effectively the government’s liabilities. Much of UK bank debt is international. The falling pound therefore exacerbate the situation.

Gordon Brown says that the situation is very different to 1976 – we are not facing a scenario where high inflation and rising wages cripple the economy. Does that mean everything is OK then?

There is more than one way to run out of money. Having a banking crisis at a time when government finances are already stretched, committing to bail out the banks and losing the confidence of the international financial community is surely another way of ending up at the door of the IMF.

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