The financial markets came to remember a basic truth in the United Kingdom, on Monday, September 26: not even developed countries benefit forever from a blank check to finance themselves. Early in the morning, with only Asian markets open after the weekend, came the warning: the pound fell to just under 1.04 per dollar, just to its multi-centennial low, before recovering slightly during the day.
Against the euro, already very low, the fall is less marked, but real: – 7% since the beginning of August. As for British government bonds, they were suddenly stretched: a ten-year loan rose from 3.5% on Friday morning to 4.3% on Monday night. The UK is now financed at almost the same price as Italy, which is at 4.5%, despite the electoral victory of a post-fascist party and a much higher debt.
It’s not a major financial crisis yet, but the warning is serious. In question: the budget presented on Friday, September 23. This comprehensive recovery plan freezes energy prices and offers the biggest tax cut in fifty years, with no effort being made to try to find a source of financing.
“Markets appear to have doubts about the credibility of the UK’s long-term fiscal plan”explains Andrew Goodwin of Oxford Economics. “This is exactly how not to organize and present a fiscal expansionadds on Twitter Olivier Blanchard, former chief economist of the International Monetary Fund. While we were worried about Italy, it was the UK that was invited. We are lucky that it is not in the euro…”
A strange debate has been going on among economists for a few months now: Has the UK, the world’s fifth largest economy, become some kind of emerging country? “It’s not when it comes to his per capita income and wealth, but he has twin huge deficits [de la balance courante et du budget] that make it worth discussing if it acts as an emerging country”, says Kaspar Hense, portfolio manager at BlueBay, an asset manager. And to think that a century ago the country was the first world power, holder of reserve currency…
19thme century. The sun never sets on the British Empire. A third of world trade is with the United Kingdom and the pound sterling is the queen of world currencies, used as a reserve throughout the world. “Having the reserve currency means [qu’un pays] can pay for it [qu’il veut] issuing checks that no one asks to cash. People see these checks as a store of value or a source of liquidity. That means you can spend a lot more than everyone else.”, explained Avinash Persaud, Professor Emeritus at Gresham College, at an exciting conference in 2011. At that time, the British pound was worth 5 dollars, five times more than today.
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