Bad debts and sterling under pressure

Rather worrying news from the banks this morning as the level of debts written off because defaulting borrowers will never repay them shot up last year.

£4.12bn in credit card loans,and £984m in mortgages were written off last year as well as other loans of £4.2bn.

In total £9.3bn will be uncollected.

It hasn't been a good day for the banks with HSBC reporting a 24 per cent fall in pre-tax profit to $7.1bn for last year mainly down to loan write offs but these were mainly in the UK.

Just to put a cap on the financial news,sterling is under pressure mainly as a result of uncertainities as to who will win the next election.The pound is currently trading under $1.50 amid concerns over who will tackle the UK’s record budget deficit.

Can a fall in the pound help the economy recover

One possible economic way out of our current dilema is to allow the pound to fall and as Chris Dillow reports,this is being considered by a future Tory government.

He quotes from Giles Wilkes' papers slash and burn in which the author says that

George Osborne’s determination to cut the deficit at all costs risks leaving the economy sluggish and the government still mired in debt, according to a new report from liberal think tank CentreForum.

adding that

Even with a monumental collapse in the pound, there is little reason to believe that Britain’s export sector could respond fast enough to drive economic growth. Instead, this policy may just as easily weaken confidence and drive interest rates up, which would wreck a fragile recovery

So according to Chris

Imagine it's 2010-11, and Osborne announces big spending cuts. The Bank of England responds by keeping interest rates low. However, the Fed and ECB start to raise rates. The UK could soon end up with almost the lowest rates in the world. Carry traders around the world will then short sterling. The pound will fall, possibly very sharply. This effect would almost certainly swamp any uplift the pound gets from improved confidence about the public finances.

Sterling being battered by the political crisis

Has anyone noticed that sterling recent recovery against the dollar has been somewhat curtailed since cabinet musical chairs began.

After spending the last few weeks recovering form its early year lows he had recovered up to Wednesday to $1.66 but coinciding with Blears' resignation and compounded by Purnell's ,it has lost 6 cents since then climbing slightly when the markets found out that Alistair Darling was staying put.

Foreign office budgets hit by demise of sterling

This morning's FT carries a report that shows another side to sterling's slide on the foreign currency exchanges.

According to the paper,

The Foreign Office is scrambling to plug a hole in its budget of up to £150m this year as the recent collapse in sterling threatens to cripple the spending power of its embassies.

Purchasing power was protected until 2007 but what the opposition describes as a “botched experiment” in currency hedging

has left the department facing higher overseas bills than expected.

And sterling continues to tumble

With all the goings on in Washington it may have escaped your notice that the value of sterling continues to fall.

The pound is now at its lowest value against the dollar since 1985 falling 2.84 per cent to $1.398.

Bank shares also continued to fall,RBS down another 11 per cent after 67 per cent yesterday

"There is no doubt that long-term investors see a risk in our UK government debt, more risk than the likes of BP and Unilever," Max King, a market strategist at Investec via BBC News.

Uk is finished-sell sell sell says a Global trader

This from Bloomberg

Jim Rogers, chairman of Singapore-based Rogers Holdings, said the “U.K. is finished” and investors should sell the currency. Commonwealth Bank of Australia said there was a high risk of a cut to the country’s credit rating outlook and lowered its pound forecast. Prime Minister Gordon Brown authorized a 100 billion pound ($142 billion) bailout for banks.
“I would urge you to sell any sterling you might have,” said Rogers. “It’s finished. I hate to say it, but I would not put any money in the U.K.” Rogers correctly predicted the start of the commodities rally in 1999.

Quite awful headline and if picked up around the world could start another run on sterling

The end to a record breaking year

Stock markets have closed for 2008 and the FTSE 100 has endured its worse yearly fall since it was established in 1984.

The index finish down 30.9 per cent for the year but a better comparison could be with the all share which was down 32.8 per cent its worst since 1974 when it fell by over 55 per cent.

According to the Guardian

A record $14 trillion (£9.7tn) has been wiped off world share values this year as stockmarkets around the world suffered their worst 12 months on record.

But it is not just shares that are slumping.The pound is now almost at parity with the Euro and oil was trading at $38 a barrel a decline of 60 per cent over the year.

Some cause for economic optimism?

There has been much written and spoken about the falling value of sterling as this week the pound hit new lows against the euro and fell to its lowest value against the dollar for over 2 years.
There are benefits though and in the Times this morning,Anatole Kaletsky argues for them.

She believes that

there is more and more evidence that the housing slump will do less damage to the British economy than is expected at present. Secondly, Britain is in generally better shape to deal with a mortgage and housing crisis than any other important European economy.

and points to America where

the country generally believed to be most vulnerable to the housing and credit crises, has done better than any other important economy - and much better than expected. Not only has the US thus far managed to avoid a recession, but the OECD's growth forecast for 2008 as a whole has also been substantially upgraded, from 1.2 per cent to 1.8 per cent

If Britain follows the American model then as house prices fall,consumers will slow spending over a longer period rather than triggering a slump.And secondly the low rate of sterling will lead to increased exports and diminished imports.This is what effectively happened in 1992 after the pound fell out of the ERM.

Of course,this second premise relies on the country having a strong manufacturing base and the question is has Britain got that ability any more.

It will also mean the Bank of England being brave and cutting interest rates.A decision on that later today but all the signs are they will stay the same