Pound falls again on deficit fears
• Sterling drops below $1.50 on warnings from ratings agency Fitch
• January's trade gap nears £8bn adding to pressure on pound
• January's trade gap nears £8bn adding to pressure on pound
guardian.co.uk,
Tuesday 9 March 2010 11.57 GMT
The pound fell to $1.494 this morning after comments from the European head of the Fitch ratings agency
Sterling fell on the currency markets again this morning following fresh concerns over Britain's soaring deficit and its trade gap.
The pound fell by 1.3 cents, taking it back below the $1.50 level at $1.494 after ratings agency Fitch said Britain must take firmer action to tackle the budget deficit. Brian Coulton, Fitch's head of Europe, Middle East and Africa sovereign ratings, warned that the government's current plans fell far short of what was needed, and said Britain's credit profile has deteriorated in recent months.
Coulton told a conference in London that Fitch was "uncomfortable with the fiscal adjustment path set out by UK authorities", and wants to see "more credible and stronger fiscal consolidation plans during the course of 2010".
According to Coulton, the UK is still "within tolerance" of its prized AAA credit rating – the "gold standard" for sovereign debt which allows Britain to borrow relatively cheaply on the world's financial markets. But he also warned that the UK, along with France and Spain, had to act with the greatest urgency or risk being downgraded.
"The UK, Spain and France in particular must outline more credible fiscal consolidation programmes over the coming year given the pace of fiscal deterioration and the budgetary challenges they face in stabilising public debt. Failure to do so will intensify pressure on their sovereign ratings," he said.
Britain's deficit for the current financial year is expected to be around £178bn, or 12.6% of GDP. This is an all-time record, and the government is expected to borrow a similar amount next year to balance the books. Alistair Darling has pledged that the deficit will halve over the next four years, with annual borrowing falling to £82bn in 2014-15. By then, under the present government's plans, Britain's total national debt, after years of high deficits, will have risen to 78% of GDP, from 56% of GDP today.
In contrast, shadow chancellor George Osborne has promised to start implementing spending cuts this summer if the Conservatives form the next administration.
A Fitch spokesman added that Coulton's comments reflected Fitch's established view over recent months, and did not indicate that the UK's credit-worthiness had suddenly deteriorated. But City traders said his comments had helped to push the pound back below the $1.50 mark.
Another factor weighing on sterling was this morning's trade data, which showed that the UK imported almost £8bn-worth of goods more than it shipped overseas in January. This was despite sterling's recent weakness, which should make British exports more attractive.
Colin Ellis, economist at Daiwa Capital Markets Europe, said the trade data had dented hopes that overseas trade might drive Britain out of the recession.
"While monthly trade data can be notoriously volatile, and we would caution against putting too much weight on one month's figures, there is still no sign of the UK transforming into an export-led economy any time soon. In part, that is likely to reflect the fact that UK exporters are more likely to be price-takers than price-setters – implying that sterling's decline may have boosted margins and profitability, rather than firms cutting prices to boost volumes," Ellis said.
Traders said the pound had also suffered from a report issued by ratings agency Moody's, which warned that it might cut the credit ratings on some UK banks as the government withdraws its support for the sector. This could potentially make it harder for them to borrow on the wholesale money markets, denting their profitability and thus the strength of the City.
Sterling fell on the currency markets again this morning following fresh concerns over Britain's soaring deficit and its trade gap.
The pound fell by 1.3 cents, taking it back below the $1.50 level at $1.494 after ratings agency Fitch said Britain must take firmer action to tackle the budget deficit. Brian Coulton, Fitch's head of Europe, Middle East and Africa sovereign ratings, warned that the government's current plans fell far short of what was needed, and said Britain's credit profile has deteriorated in recent months.
Coulton told a conference in London that Fitch was "uncomfortable with the fiscal adjustment path set out by UK authorities", and wants to see "more credible and stronger fiscal consolidation plans during the course of 2010".
According to Coulton, the UK is still "within tolerance" of its prized AAA credit rating – the "gold standard" for sovereign debt which allows Britain to borrow relatively cheaply on the world's financial markets. But he also warned that the UK, along with France and Spain, had to act with the greatest urgency or risk being downgraded.
"The UK, Spain and France in particular must outline more credible fiscal consolidation programmes over the coming year given the pace of fiscal deterioration and the budgetary challenges they face in stabilising public debt. Failure to do so will intensify pressure on their sovereign ratings," he said.
Britain's deficit for the current financial year is expected to be around £178bn, or 12.6% of GDP. This is an all-time record, and the government is expected to borrow a similar amount next year to balance the books. Alistair Darling has pledged that the deficit will halve over the next four years, with annual borrowing falling to £82bn in 2014-15. By then, under the present government's plans, Britain's total national debt, after years of high deficits, will have risen to 78% of GDP, from 56% of GDP today.
In contrast, shadow chancellor George Osborne has promised to start implementing spending cuts this summer if the Conservatives form the next administration.
A Fitch spokesman added that Coulton's comments reflected Fitch's established view over recent months, and did not indicate that the UK's credit-worthiness had suddenly deteriorated. But City traders said his comments had helped to push the pound back below the $1.50 mark.
Another factor weighing on sterling was this morning's trade data, which showed that the UK imported almost £8bn-worth of goods more than it shipped overseas in January. This was despite sterling's recent weakness, which should make British exports more attractive.
Colin Ellis, economist at Daiwa Capital Markets Europe, said the trade data had dented hopes that overseas trade might drive Britain out of the recession.
"While monthly trade data can be notoriously volatile, and we would caution against putting too much weight on one month's figures, there is still no sign of the UK transforming into an export-led economy any time soon. In part, that is likely to reflect the fact that UK exporters are more likely to be price-takers than price-setters – implying that sterling's decline may have boosted margins and profitability, rather than firms cutting prices to boost volumes," Ellis said.
Traders said the pound had also suffered from a report issued by ratings agency Moody's, which warned that it might cut the credit ratings on some UK banks as the government withdraws its support for the sector. This could potentially make it harder for them to borrow on the wholesale money markets, denting their profitability and thus the strength of the City.
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