Generally it’s a good thing when a nation cuts its budget deficit. But if Britain does so too sharply, its currency could plunge 30 percent, says the Swiss Bank UBS.
The deficit is expected to hit 178 billion pounds ($271 billion) this year.
And if the government slashes that figure too quickly, it will "endanger tax revenues, Britain's sovereign rating, the recovery of the banking sector and the U.K. labor market," UBS said in a report obtained by the London Telegraph.
Those economic woes wouldn’t augur well for sterling. Quick fiscal tightening would cause a “savage” reaction in the currency market, write the report’s authors George Magnus and Mansoor Mohi-uddin.
"The severe fall in sterling after such a policy mistake would reflect a crisis of confidence in Britain's policymaking," the report says.
That crisis could send the pound to $1.05, a 30 percent drop from current levels, and it could fall below one euro for the first time, UBS says.
The report rebuts U.K. Conservatives who argue that a failure to tackle the deficit will send Britain will tip Britain back into recession.
Experts such as Roger Bootle, managing director of research group Capital Economics, say the possibility of a double-dip recession is real. “Deflation is a live risk,” the former Treasury adviser told Bloomberg.
“We’re entering a very grave stage, and moving into next year, it’s going to be a very dangerous situation.”
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