Pound may need to fall to plug the hole of UK’s international debt

Currency performance: The 10 and five pound banknotes sit in this arranged photograph in London. The currency will have to probe to find a level where foreign investors believe the long-term return on UK assets is attractive. — Bloomberg

LONDON: Borrowing costs in the UK will ultimately determine how far sterling needs to fall to plug the country’s external deficit.

Bonds and sterling have sold off sharply in recent days (notwithstanding the relief rally), but it’s the market with the lower liquidity –gilts – that will be the main determinant of sterling’s performance.

Five-year gilt yields are at around 4.6%, from only 3% earlier this month.

Around 25% of the gilt market is held by overseas investors, so government borrowing costs are very sensitive to capital that could easily find an alternative home (and some surely has already).

When government borrowing costs rise, borrowing costs for the private sector rises –for companies through debt and loans, and for households principally through rising mortgage costs.

Moreover, some of the current rise in rates will get baked in, even if the Bank of England ultimately doesn’t have to hike as high as the 5.5% to 6% the market is currently expecting. The government, or any company issuing debt now, will be locked in at a higher rate.

Ditto for any mortgage holder re-fixing.

There is thus no way for the UK to completely undo the recent damage done.

And the UK has a huge stock of debt it needs to service and refinance, a net £900bil (RM4.52 trillion) of it.

As gilt yields rise, private-sector borrowing costs will also rise, damaging firms’ balance sheets and deterring investment.

On the top of that, mortgage holders will see their costs rise too.

Needless to say, this will be detrimental for the economy.

Sterling is the release valve.

The currency will have to probe to find a level where foreign investors believe the long-term return on UK assets is attractive enough.

Similarly, there will be a level of a sterling where UK holders of foreign assets find it attractive to repatriate the capital.

Unfortunately for the UK, that large debt held by international investors means capital can leave faster than it comes back in. —Bloomberg

Article type: free
User access status:
Subscribe now to our Premium Plan for an ad-free and unlimited reading experience!


Next In Business News

Oil rebounds after hitting 2022 lows, demand concerns cap gains
Financial planners urged to embrace technology to better serve clients
KL shares flat at midday
Elon Musk briefly loses top spot on Forbes billionaire list
Asia stocks edge up despite global growth worries
Malaysian banks remain steadfast in supporting economic recovery
Ringgit opens higher against US dollar
Muhibbah gets to increase orderbook with PETRONAS Carigali job
Quick take: KNM falls 10% in active trade over default concerns
FBM KLCI little changed in early trade

Others Also Read