Parity unlikely to halt the slide of the pound

Dec 19 2008 By Nevill Boyd Maunsell

Each day we get a new reason why the pound continues its effortless descent through some supposed psychological barrier that turns out to be no barrier at all.

Yesterday you could choose between Charlie Bean, a deputy governor of the Bank of England, and an awesomely dreadful set of public borrowing numbers, or a mix of the two.

Mr Bean told a newspaper that British interest rates could follow America’s down to zero per cent.

The numbers revealed that the public sector borrowed a breathtaking £16billion last month, an all-time record for any month at any time of year, taking the tally for the tax year since April to £56.1billion.

Less than a month after chancellor Darling’s pre-Budget statement, his promised £20billion “fiscal stimulus” is set to bust his forecast of £77.6billion for public borrowing for the whole 2008/09 withoutanything else going wrong at all.

That raises the question of who will do the lending and why. For whatever reason, sterling sagged again, this time to a point where the euro was worth more than 95p.

It is all very well to say “no bad thing, our exporters can do with a break”, but export orders are drying up regardless. Europe is our biggest export market, but that is little use while Europeans are too recession-shocked to be tempted by British bargains.

Victims of the collapsing pound include foreigners who have been buying gilts on such a scale that they now own one-third of the government’s £650billion debt.

They must have bought it because they thought of it as some sort of safe haven because British governments don’t default – they just pay in deeply devalued pounds.

For all that, there is no sign so far of gilt investors taking fright at this rolling devaluation, nor indeed at the bizarre news that the market for credit default swaps was rating McDonald's as a better bet than the British government.

Gilts have had a good run this month. They all yield less than the official measure of inflation.

Even in sinking pounds, gilt investors are paying the government to look after their money.

True, that inflation is abating fast and should vanish altogether for a spell next year. But it seems a fragile base for going out to borrow £16billion for a single month – before Alistair has paid out a penny for his “stimulus”.