Well hung, or hung over?

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eurograph

WELL that’s the dilemma that faced the UK electorate the morning after the election. Despite the televised debates and the daily onslaught of opinion polls the three main failed to deceive… sorry… convince enough voters to give them the 326 seats needed for a majority. The UK is now faced with the prospect of a coalition government -potentially a Conservative/Lib-Dem coalition. Mr Brown legally is still Prime Minister which reminds me of those times when you have a stubborn houseguest who has outstayed their welcome and no matter how much you yawn or offer them more coffee, they steadfastly refuse to go.

WELL that’s the dilemma that faced the UK electorate the morning after the election. Despite the televised debates and the daily onslaught of opinion polls the three main failed to deceive… sorry… convince enough voters to give them the 326 seats needed for a majority. The UK is now faced with the prospect of a coalition government -potentially a Conservative/Lib-Dem coalition. Mr Brown legally is still Prime Minister which reminds me of those times when you have a stubborn houseguest who has outstayed their welcome and no matter how much you yawn or offer them more coffee, they steadfastly refuse to go.

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The next couple of weeks are critical for the direction of sterling, and if the price action in the first few hours following the election results is anything to go by it doesn’t bode well if a credible coalition cannot be found.

The financial markets, and more importantly the ratings agencies, have given the UK a stay of execution in the downgrading of the UK and its ability to reduce its deficit. The UK is by no means Greece…well, not yet anyway…. even if a European Commission report last week forecast a 12 per cent UK budget deficit this year, outstripping Greece and all other European Union members.


Interestingly, UK government debt, at 79.1 per cent, was forecast to remain below, albeit just below, the 79.6 per cent EU average, and remains in a different league from Greece’s 124.9 per cent, or indeed Italy’s 118.2 per cent. And the two-year forecast for Britain’s growth, moreover – 1.2 per cent, then 2.1 per cent – surpassed the EU average.

However if the markets decide you have a problem, then you have a problem! And if the sharks are indeed circling the UK then a messy bout of squabbling and political horse trading could see the pound move sharply lower. Remember my unwanted house guest analogy? Well Mr Gordon is well within his constitutional right to stay in number 10 until at least  May 25, and that is something I can’t see the markets tolerating.

If we do get a conservative led coalition then there is every chance that the pound will gain confidence of the world market and move higher. Now don’t forget that while the UK election is something of a hangover, the real story is the problems in the euro-zone, namely Greece, and the real threat of contagion spreading to Spain and Portugal.

Over the weekend the EU did agree a $750 billion fund to prevent this spread of contagion. This could well be positive for the Euro in the short-term however the euro-zone countries generally struggle to decide amongst themselves what they want for breakfast, let alone how to manage a successful salvage operation and the handling of the Greek crisis has been nothing short of shambolic!


If the European governments cannot stop the rot in Europe then the Euro could be in for one hell of a beating. It’s likely the ratings agencies will once again downgrade a major European country and let’s hope that while they have their knives out they don’t have a stab at the UK.

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