In These New Times

Helen Power

Times

28th October, 2008

The pound plummeted close to a six-year low yesterday. The currency’s losses in recent months now mirror its demise after Black Monday in 1992, when John Major pulled Britain out of the exchange-rate mechanism and destroyed the Conservatives’ reputation for economic management.

In London the pound hit a low of $1.5280, down from $2.01 three months ago, while shares in British companies tumbled again, leaving the FTSE down 30.77 at 3852.59, its lowest close since the invasion of Iraq in the spring of 2003.

The descent of the pound drew comparisons with the early 1990s. Then it fell 50 cents from $2.01 to $1.50 – but this time the downward spiral of the currency is gathering momentum.

“People are selling the pound because it’s there. There’s no reason for them not to,” said Nick Parsons, head of markets strategy at National Australia Bank, who is forecasting that the pound will go as low as $1.40 early next year.

“We will go down further because the problems the UK faces are worse than other countries. We are uniquely exposed because of the sheer amount of debt we’ve got.”

In the past two years British consumers have flocked to New York to do their Christmas shopping as the pound, bolstered by high interest rates and a booming City, hit record highs against the dollar.

This year holidaymakers who cannot cancel their trips will find that the dollars in their pockets are worth nearly 25 per cent less than they were last year, making those Bloomingdale’s buys much less of a bargain.

Those who stay at home are set for a gloomy festive season because the pound is also down against European and Asian currencies, making imported goods far more expensive.

But there will be British winners from the fall of sterling.

A low pound is good news for exporters, particularly in the manufacturing sector, who have struggled to compete in overseas markets for the past few years.

“A lower pound is part of the solution, not the problem,” Mr Parsons said. “Those exposed to the export markets will do very well.

His words echo those of Harold Wilson in 1967 when he devalued the pound. “Our decision to devalue attacks our problem at the root and that is why the international monetary community have rallied round,” the Prime Minister then said. “What it does mean is that we shall now be able to sell more goods abroad on a competitive basis.”

However, manufacturers accounted for a far bigger proportion of the economy then, but form only a tiny part now – 14 per cent – and the plummeting pound, which is intrinsically linked to the falling stock market and the country’s rapid slide into recession, is bad news for the vast majority.

Last night economists were questioning how bad the recession might be. Paul Dales, of Capital Economics, said: “It will be at least as bad as the early 1990s. But if the banks continue to retract their lending it will be a lot deeper. With unemployment rising, a lot of people won’t want to borrow anyway.”

The banks and businesses perceived as particularly vulnerable to a wider global economic malaise were singled out for further punishment on the London stock market yesterday.

Shares in Standard Chartered bank, which is exposed to developing countries, fell 10.2 per cent and the mining giants Xstrata and Lonmin closed 8.8 per cent down and 7.4 per cent down, respectively.

The entire mining industry has been hit hard by a fall in demand from a previously booming China, which has cut back its consumption of raw materials as its Western export customers hit the recession.

Evidence is growing that much of the rout is also being driven by hedge funds, which buy shares and debt in big companies but whose own investors are increasingly demanding their money back because they are terrified by falling prices.

Scared by plummeting equity and debt markets, investors in hedge funds have inundated them with so-called redemptions, which are requests to get as much money out as possible.

In order to meet the requests, hedge funds have become forced sellers of their best, easiest-to-sell shares. In a vicious spiral, the market has become flooded with these otherwise good-quality stocks, reducing their price and in turn creating huge losses for hedge funds. That has panicked investors even further and forced funds to sell yet more assets.

Some of London’s biggest hedge funds, which have lost billions this year, are struggling to keep pace with redemption demands. RAB Capital, the fund run by Philip Richard, who has given millions to church charities, was forced last week to close more of its funds to prevent investors withdrawing their money.

Toscafund, one of the funds that helped to break up Barclay’s bid for its rival ABN Amro, but took ill-fated punts on British housebuilders, has lost 62 per cent of its value this year.

Jon Moulton, founder of the private equity house Alchemy and a notable economic doom-monger, says that things can only get worse for the hedge funds.

“Give it another few days and you’ll see all manner of problems surfacing. We expect lots of funds to go bankrupt,” he said.