With the economy barely crawling out of recession, a rapid fiscal retrenchment would be treated to a "savage" reaction in foreign exchange markets, according to a new report by strategists at Swiss bank UBS.
Taking too sharp an axe to the deficit - projected to reach £178bn this year - would "endanger tax revenues, Britain's sovereign rating, the recovery of the banking sector and the UK labour market," the strongly-worded report argues.
Such a scenario would transform the pound's steady and welcome decline since the start of the financial crisis into something much more dangerous, the report's authors, George Magnus and Mansoor Mohi-uddin, claim, as scepticism about the ability of Britain to repay its debts would increase.
"The severe fall in sterling after such a policy mistake would reflect a crisis of confidence in Britain's policymaking," the report says.
(AtW's comment:
paper money printing
)
With confidence in British policymaking gone, the pound would risk plunging to $1.05 against the dollar and slumping beyond parity for the first time against the euro. Sterling was trading at $1.54 against the dollar and 88p against the euro in early afternoon trading on Wednesday.
The report comes as a blow to the Conservatives who are staking their claim for economic competence on the argument that a failure to take immediate and aggressive action on the deficit will tip Britain back into recession. Gordon Brown is trying to win round voters with the opposite argument.
More here: http://www.telegraph.co.uk/finance/c...UBS-warns.html
Taking too sharp an axe to the deficit - projected to reach £178bn this year - would "endanger tax revenues, Britain's sovereign rating, the recovery of the banking sector and the UK labour market," the strongly-worded report argues.
Such a scenario would transform the pound's steady and welcome decline since the start of the financial crisis into something much more dangerous, the report's authors, George Magnus and Mansoor Mohi-uddin, claim, as scepticism about the ability of Britain to repay its debts would increase.
"The severe fall in sterling after such a policy mistake would reflect a crisis of confidence in Britain's policymaking," the report says.
(AtW's comment:
paper money printing
)
With confidence in British policymaking gone, the pound would risk plunging to $1.05 against the dollar and slumping beyond parity for the first time against the euro. Sterling was trading at $1.54 against the dollar and 88p against the euro in early afternoon trading on Wednesday.
The report comes as a blow to the Conservatives who are staking their claim for economic competence on the argument that a failure to take immediate and aggressive action on the deficit will tip Britain back into recession. Gordon Brown is trying to win round voters with the opposite argument.
More here: http://www.telegraph.co.uk/finance/c...UBS-warns.html
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