MARKETS will teeter on the brink today, after the Tories and the Liberal Democrats walked away from coalition talks without striking a deal.
Negotiators from both parties emerged from the cabinet office after seven hours of discussions, with little detail on progress.
Shadow foreign secretary William Hague, leading negotiations on behalf of the Tories, said the talks had been “very positive and productive,” adding that the main focus was “economic stability and the reduction of the budget deficit”.
Nick Clegg’s chief of staff Danny Alexander issued a remarkably similar statement, clearly intended to calm jittery financial markets.
He said: “Any plan will have deficit reduction and a credible economic plan at its heart.”
But neither side offered any details of what had been discussed, and there was no indication of how long they expect to take to reach a deal, save for a vague commitment to meet again in 24 hours.
Paralysis in Westminster is stoking fears that Britain will struggle to get the necessary political backing to cut public spending and reduce its massive £163bn budget deficit.
The developments followed a day of high drama in Westminster, as party leaders rushed between Whitehall buildings to engage in backroom horse-trading.
Gordon Brown returned from Scotland to London for a meeting with key allies, including deputy Labour leader Harriet Harman, energy secretary Ed Miliband and business secretary Lord Mandelson.
He then left Number 10 by the back door and snuck into the foreign office, where he held an “amicable” meeting with Clegg on the possibility of a grand anti-Tory coalition.
However, a tie-up between the Tories and the Lib Dems is still more likely. The Lib Dems could either go into coalition government with the Conservatives, or support them on crucial pieces of legislation like the budget.
Howard Archer, chief economist at IHS Global Insight, said the Tories and Lib Dems had to flesh out their plans before the markets open today, as sterling, the FTSE and gilts are “vulnerable to a major sell-off”.
Archer said: “With the markets being highly nervous and fragile in the wake of the Greek crisis and in the mood to penalise any country that is perceived to be falling short on its deficit reduction needs, it is of paramount importance that a credible commitment on how to tackle the dire UK public finances is in place sooner rather than later.
“The more slippage there is on this, the more that the UK markets are at risk of being hammered.”
Markets have already taking a battering, with the FTSE 250 tumbling 4.1 per cent on Friday amid the realisation that no one party had won a convincing majority. Sterling fell nearly 3 cents to close as $1.4682.
Fears are being exacerbated by uncertainty in mainland Europe, where emergency talks are underway to agree a plan that would stop Greek’s fiscal crisis spreading to other countries.
The IMF could offer up to €500bn in emergency loans to Portugal, Greece, Italy, Ireland and Spain in a bid to shore up the eurozone finances.
And yesterday German chancellor Angela Merkel’s centre-right alliance lost control of North Rhine-Westphalia, the country’s most populous state. The defeat could hinder Merkel’s ability to offer further support to indebted EU member states.