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Expenses scandal latest blow for sterling

Allister Heath

IT was no coincidence that sterling fell yet again yesterday as the expenses scandal flared up once more. The revelation that Gordon Brown is having to reimburse £12,400 – and many other MPs from all parties will have to pay back some of their expenses – can mean only one thing: Britain’s political establishment is indeed its weakest link, with insufficient collective self-control to take decisions that are truly in the public interest. No wonder we are in such a mess. We should never forget that while capitalists and free markets are far from perfect, politicians and regulators tend to be much worse. Our self-interested and all too human political class is as far from the ideal of the Platonic Guardian as it is possible to imagine.

But the expenses scandal has merely reinforced a growing feeling of ill-ease across London’s business community: the economy has exited recession; the stock market is doing well thanks to plentiful liquidity; but the climate remains very tough – tougher certainly than many executives had been expecting – and regulators and politicians are likely to make life far worse than it needs to be. This renewed pessimism about the prospects for Britain, while nothing like as bad as what we saw six months ago, is nevertheless a worrying trend.

It doesn’t help that while all parties now accept that drastic action is needed to tackle the budget deficit, investors are still looking for proper, carefully-costed policies. Yet so far they have only been presented with preliminary ideas from the Tories to shave a few billion pounds a year from the shortfall (George Osborne’s team is quietly working on much more radical proposals but markets will need tangible evidence before they can relax). Labour’s position is even more depressing, as exemplified by Brown’s belief that selling off the Dartford Tunnel will make a blind bit of difference to Britain’s national debt, which is growing by £15bn a month.

There is also nervousness at the housing market, which is recovering too well for comfort. But the biggest question of all is what will happen to monetary policy. Yesterday’s speech by Brown, where he backed quantitative easing while accusing the Tories of misunderstanding it, suggests he believes that he is firmly in charge, rather than Mervyn King, who is supposed to decide about these things independently. Markets are also well-aware that gilts are suffering from a false market as a result of the Bank’s huge purchases of government debt; nobody has any idea what will happen once quantitative easing ends – nor what the fate of riskier assets (such as equities) will be. They are currently being propped up by the additional liquidity generated by the Bank.

The only good news for fixed income investors is that commercial banks will soon have to take over from the Bank and start purchasing at least £100bn worth of gilts to improve the liquidity of their balance sheets; but timings may not coincide. All of these issues started to irk investors in earnest a few weeks ago but they have taken a renewed relevance in recent days. Traders are now selling the pound more heavily than at any point since records began in 1972, according to the US Commodity Futures Trading Commission. The only reason sterling hasn’t slumped further is that the greenback is itself under immense pressure – hardly an endorsement for Britain’s battered political system.
allister.heath@cityam.com