Brace your­self for the ‘fudge’ cri­sis over Ster­ling

The Irish Times - - Businesstoday - Chris Johns

Ster­ling’s decline has re­cently re­sumed, al­beit gen­tly. Per­haps the only sur­pris­ing thing about that state­ment is its last word. Sea­soned mar­ket watch­ers are sur­prised that the pound is not a lot lower, such is the ut­ter chaos sur­round­ing the UK’s prepa­ra­tions for its imminent de­par­ture from the EU.

While a cur­rency cri­sis on the scale be­ing wit­nessed in Turkey is un­likely, the prospect of the hard­est Brexit – a 60 per cent chance, ac­cord­ing to the trade sec­re­tary, Liam Fox – should be send­ing the UK cur­rency a lot lower.

Turkey’s cur­rency woes look a lot like the events that started the great Asian fi­nan­cial cri­sis of 1997.

That started with the Thai baht: it’s a pe­riod of fi­nan­cial his­tory that even has its own nick­name: the Tom Yum Goong cri­sis.

The whimsy be­hind that la­bel arose mostly from the fact that it all felt very se­ri­ous for a while but didn’t ac­tu­ally last very long.

It prompted some fun­da­men­tal re­forms in emerg­ing mar­kets, which strength­ened their fi­nan­cial ar­chi­tec­ture; pol­icy re­forms that led to in­creased eco­nomic re­silience.

About the only thing that can be ex­pressed with any cer­tainty is that it is now a lot cheaper to go on hol­i­day in Turkey: it’s a fab­u­lous coun­try to visit and I hope that tourism, at least, is the sil­ver lin­ing to Turkey’s cur­rent fi­nan­cial woes.

Don­ald Trump’s re­cent stir­ring of the pot with in­creased tar­iffs on Turk­ish ex­ports is a re­minder that no two crises are ever the same.

The ma­lign in­volve­ment of the US pres­i­dent is a new, if not unique, fea­ture of the cur­rent sit­u­a­tion and serves as a warn­ing.

Trump’s views and ac­tions on in­ter­na­tional trade pose a threat to just about any trad­ing na­tion, big or small.

Dur­ing the Asian cri­sis, there was a fear of “domino effects”: an­a­lysts sug­gested that if Brazil de­val­ued, there would be an in­ten­si­fi­ca­tion of the tur­bu­lence that risked spi­ralling out of con­trol.

When the Brazil­ian cur­rency did go down, it in fact marked the be­gin­ning of the end of mar­ket dis­lo­ca­tion.

Dis­puted cri­sis

To this day the causes of the cri­sis are dis­puted: no­body saw it com­ing, its end­ing was wholly un­ex­pected and many an­a­lysts have dif­fer­ent views about what were the un­der­ly­ing driv­ers of both that start and fin­ish.

Which all goes to show that we need to be very care­ful when mak­ing pre­dic­tions about ex­change rates (or any­thing at all).

But his­tory re­peat­edly teaches that crises can come out of the blue. It’s why many com­men­ta­tors urge our own Min­is­ter for Fi­nance to think about build­ing re­silience into the fis­cal sit­u­a­tion in an­tic­i­pa­tion of a nega­tive eco­nomic sur­prise.

Good ad­vice

That’s good ad­vice, of course, ap­pli­ca­ble at any time in the eco­nomic cy­cle but par­tic­u­larly ap­po­site when things are go­ing well.

The threats to the cur­rent global eco­nomic ex­pan­sion are all too ob­vi­ous: they are mostly fo­cused on the ac­tions of Don­ald Trump.

His mas­sive tax cut for rich Amer­i­cans and com­pa­nies al­ready flush with prof­its will have long-last­ing effects, not many of which are likely to be good. The effects of his con­tin­u­ing es­ca­la­tion of his trade war will al­most cer­tainly sooner or later lap up at our shores.

We have our own ex­pe­ri­ence of cur­rency cri­sis, al­beit one that is now fast fad­ing from mem­o­ries. Of course, one of the few joys of the euro is that a small mem­ber such as Ire­land will never have the eco­nomic clout suf­fi­cient to pro­voke a cur­rency cri­sis on its own.

We don’t have our own cur­rency, so a home-grown ex­change rate cri­sis is highly im­prob­a­ble. But, as we know, cri­sis can come in many forms, not just via the ex­change rate.

Brexit ver­sus growth

So why isn’t ster­ling hav­ing its own ma­jor Brexit-in­duced cri­sis? The most plau­si­ble ex­pla­na­tion is to be found in the fact that the UK econ­omy is still grow­ing, al­beit only rel­a­tively slowly. The only adults in the pol­icy room are Bank of Eng­land of­fi­cials, who are do­ing a good job in very dif­fi­cult cir­cum­stances. Most im­por­tantly, most mar­ket par­tic­i­pants don’t be­lieve Fox. There is a widely held view that while there is no pos­i­tive out­come pos­si­ble, the fears of catastrophe are wildly overblown.

The most com­monly held view in the City of Lon­don is that fudge is still very much on the menu.

In­sid­ers reckon a deal be­tween Theresa May and Brus­sels is still just about achiev­able, al­beit one that has fudge as starter, main course and dessert on the menu. I think that’s what the mar­kets are bet­ting on.

But that is some­what my­opic: fudge may well be the meal of choice but what hap­pens when din­ner is over?

No mat­ter what type of deal is done – and there are many plau­si­ble pos­si­bil­i­ties – it is next to im­pos­si­ble to see how Ms May can sell it to the House of Com­mons. Ev­ery pos­si­ble deal up­sets one im­por­tant con­stituency or an­other: that’s the na­ture of ev­ery deal be­ing a bad one.

If a deal is done, ster­ling is likely to go up. And then it will prob­a­bly fall when par­lia­men­tary chaos en­sues. Up and down: a weasel fore­cast, but one that says we should ex­pect a lot of volatil­ity. The “fudge cri­sis” per­haps.

If a deal is done, ster­ling is likely to go up. And then will prob­a­bly fall when par­lia­men­tary chaos en­sues

Newspapers in English

Newspapers from Ireland

© PressReader. All rights reserved.