Tags: hans | parisis | pound | greece

A Trillion Ounces of Prevention as a Cure for the Pound

Friday, 14 May 2010 07:16 AM Current | Bio | Archive

The United Kingdom has a new Conservative-Liberal Democrat coalition government that will have a majority in the next Parliament, which was certainly the market’s favored permutation of the hand dealt by the electorate in last Thursday’s general election.

No doubt, that outcome is inferior to a single-party majority.

And, given the ideological divisions between the coalition partners, the passage of legislative bills through Parliament could arguably become individual risks for the British pound if “honeymoon” conciliation gives way to hardening dogma.

In my opinion, this is potentially a future supplementary risk for the British pound, but not for now. (As is the small matter of the U.K.’s burgeoning fiscal deficit that is at about 12.8 percent of GDP).

Nevertheless, for the moment at least, the British pound’s revival and the ongoing malaise clouding the euro zone have left the euro-pound balanced precipitously above a void (that probably will be bridged) of technical support.

For investors, this is a particularly significant point because right now, there are numerous hurdles that the euro must overcome if it is to become a stable entity.

There is first the question of just whether Greece can successfully implement the Draconian measures to which it has just agreed.

The Greek government will be attempting to implement nothing short of a cultural revolution amid a depth of feeling that will not be assuaged with ease, if at all.

Honestly, I have my serious doubts.

Besides all that, it now becomes clear that Greece will be joined by Spain, Germany and other member states in implementing a simultaneous policy tightening, which will logically result in cuts of their respective consumption appetites.

There are also questions surrounding the European Central Bank’s about-face on government bond purchases.

Talk of duress, and hence the bank’s independence, has been dismissed by ECB President Jean-Claude Trichet.

What else could he say?

But, and this isn’t to be taken lightly, the Bundesbank’s open disdain for the plan is surely a source of embarrassment for Trichet, given that he and his predecessor, Wim Duisenberg, have always modeled ECB ideology on that of the German central bank, the Bundesbank.

The Bundesbank chief, Axel Webber, said this week that “buying government bonds entails considerable stability policy risks, and thus I regard this part of the ECB council's decision critically.”

As for the EU’s funding package, now that the “shock and awe’” has dissipated, the market has, once again, more questions than answers.

How will euro-zone states will be able to afford to contribute in the midst of fiscal consolidation?

How will the German public “agreeably” subsidize others’ failed social programs at the expense of their own?

Let’s remain realistic and admit that while the euro zone’s safety net is truly impressive, there is a serious probability it will do little to enhance protection for this high-wire act.

Meanwhile, the European Commission met to discuss the EU’s future budget rules.

From what we can gather, preliminary proposals, including closer inspections of member states’ Treasuries and the integrity of their data, are likely to become a reality.

However, the sequel to The Stability and Growth Pact will probably suffer the same Achilles heel as its predecessor: the political pressure and temptation that governments will face to increase spending (via deficit financing) in a downturn.

Would investors be willing to place faith in an entity whose predecessor failed so miserably?

This remains to be seen but for the moment, investors may not be willing to give it the benefit of the doubt.

Bottom line: Investors who would like to diversify somewhat could play the British pound against the euro with little risk exposure during the new U.K. political honeymoon.

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The United Kingdom has a new Conservative-Liberal Democrat coalition government that will have a majority in the next Parliament, which was certainly the market s favored permutation of the hand dealt by the electorate in last Thursday s general election. No doubt, that...
Friday, 14 May 2010 07:16 AM
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