GBPEUR
In the FX markets, December saw the GBP trading at parity with the EUR, its worst performance yet this year but a price target predicted by analysts in a self-fulfilling prophecy. Alastair Darling's remarks earlier in the year accelerate the sell-off.
GBPUSD
In July sterling was trading at $2, then dwindled to $1.50. Why? Partly Britain's public finances - the Treasury's pre-Budget report forecast UK public borrowing will rise to £78bn for 2008-09 and then to £118bn in 2009-10 (8% of GDP). These figures though are not consistent with data from the ONS.
Analysts point out a high level of government borrowing tends to spell trouble for sterling. A post-war high was reached in 1974-75 (6.9% of GDP), which led to Britain asking the IMF for emergency funding in 1976. The Treasury's counter is that it believes the recession will be shallow and brief. The UK has been running a deficit since 2002/2003.
The CDS market for sovereign debt has indicated the cost of insuring default by the Treasury on its gilts over 5 years has reached 100bps over Libor (7.2 bps a year ago). Analysts CEBR announced (speaking about the recession across Europe): "The United Kingdom economy is likely to be the hardest hit by the credit crunch due to its reliance on consumer borrowing and the financial sector for growth".
But who is trading in the sovereign CDS market and why? BoA research provides some answers.
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