Is the pound going to collapse?

At the time of writing, one British pound cost 4.98 dirhams. This is the cheapest the pound has been against the dirham for 24 years.

Great news for British expatriates living in the UAE wanting to send money home? Perhaps. But there is now a strong argument to be made that the pound could soon collapse.

The pound is now 25 percent weaker than it was a year ago, a stark fact that would normally be good news for British exporters (manufacturing now only accounts for 14 percent of the British economy), but downturns in Britain's key export markets, America and Europe, mean that the boost has been insignificant.

These are terrifying times for the global economy. Increasingly, today's crisis bears easy comparison with the fallout from the Wall Street Crash in the 1930's. Globalisation could well make the crisis worse than it was then.

David Cameron, leader of the British opposition party the Conservatives is calling for the International Monetary Fund to come to Britain's aid. The British Centre for Economics and Research predicts that the British economy "is set for the steepest contraction in the post-War era, with a fall in the region of three percent year-on-year."

But it could well be worse than that. In October last year, in a move intended to boost confidence in the British banking system, British Chancellor of the Exchequer Alistair Darling effectively issued a government guarantee of failing British banks with a ₤37 billion bailout package.

That money has disappeared, sucked into a void, and yet the banks continue to fail as the contagion from the international credit crisis mutates. The bailout was an epic gamble, and a futile one.

British national debt stands at ₤400 billion, and annual borrowing as a percentage of gross national product is now higher than it was in 1976, which was the last time Britain had to turn to the International Monetary Fund for rescue.

That ₤400 billion is a worryingly large figure for a country which manufactures little, and has come to rely in recent decades increasingly on the fortunes of London's financial district. However, ₤400 billion is relatively small change when set against the exposures of the nation's banks.

Take, for example, the RBS group, which owns the Royal Bank of Scotland and NatWest, and which also took over failing Dutch bank ABN Amro. RBS, of which the British taxpayer now owns 58 percent, is exposed to the tune of two trillion pounds. Five times the national debt. In February, the bank will announce its annual results, expected to be a loss of ₤30 billion.

The bank cannot be allowed to fail, because the ramifications for the British tax payer are unconscionable, yet keeping it afloat is becoming an increasingly impossible task.

RBS is the bank that recently is most often in the news for disastrous management and decision making, but there are other British banks that are doing almost equally badly, banks also effectively guaranteed by the government. Northern Rock is one. And so too are Lloyds, Bradford and Bingley, and HBOS. Barclays, too, could join the list soon if its share price continues to nosedive.

Should the credit crisis not end soon - and there are no signs that is anywhere near being over (indeed, many believe that it will take a decade to pass, if not longer) - then it is quite reasonable to believe that British national debt could be increased, suddenly, by many multiples when any of these government guaranteed banks go under.

And when that happens, what next? One plausible scenario is that investors run for the hills, the currency collapses, and the government is forced to print more money, something the Bank of England is already contemplating doing.

Every school child learns about the hyper-inflation that occurred in Germany in the 1920's when money was printed. Similarly, hyper-inflation is occurring today in Zimbabwe as Robert Mugabe looks to the money mints to print his way out of economic trouble.

Britain today is officially in recession, for the first time in 17 years. A recession is two consecutive quarters of negative growth. In the final three months of 2008, the British economy shrank by 1.5 percent (its sharpest contraction for 29 years). In the third quarter of 2008 it had fallen by 0.6 percent, ending a run of growth for 64 consecutive quarters.

Prime Minister Gordon Brown, who was Chancellor of the Exchequer before becoming the nation's leader, has talked proudly in the past about his record on the economy, and has claimed to have ended "boom and bust economics." It would seem that such an assertion was profoundly wrong.

Perhaps now is not, then, the time to send dirhams to Britain.

Damian Reilly is the editor of Arabian Insight.

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READERS' COMMENTS

Is the pound going to collapse?
Posted by M Masud Alam, Almaty, Kazakhstan on Saturday 7 February 2009 at 09:12 UAE time


1. Pound had fallen against USD from 2.12 to 1.37 , 35% from its peak of last year and at todays level of 1.48 it is still 30% down. Not 25%

2. It is better to predict that pound will collaspe when it is near 2.00 than now

3. George Soros has stopped betting against pound below 1.40

4. what more collapse we need , to go to 1.00 against USD?

5. The problem is when the market goes to extreme level, predictions also becomes extreme like when oil was at 148
people said now it is going to 200$ a barrel and that is the indictaion that market is going to reverse and look at where oil is trading today

6. it is true that pound is not going to go to 2.00 soon , it may even see 1.25 , but these are good levels to send some savings home rather than wait for the pound to go further down.

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