Economist warns of vulnerable sterling, gilts

The possibility of a collapse in sterling due to concerns over the UK’s debts was raised by the Centre for Economic and Business Research (cebr) today.

An economist at the organisation said that the question of foreign investors’ confidence in Britain was key - and that both the pound and government bonds (gilts) were at their mercy.

Standard & Poor’s (S&P) put the UK’s AAA rating on its sovereign debt on ’negative’ outlook last month, raising concerns over the record deficits being run up in the credit crunch.

The government’s own figures suggest that the nation’s net debt will rise from 40 to 80 per cent of GDP over the years to come.

However, S&P suggested that this total could go to over 100 per cent - which could in turn damage the UK’s perceived credit-worthiness.

A sterling collapse or a sharp decline in government bond prices would both be greatly damaging to economic growth over the long term

Arek Ohanissian, cebr economist, said: ’The question really is whether people are going to start punishing sterling and gilts, foreigners in particular, because they’ll lose confidence. That’s what the S&P move is really bringing to the forefront – that issue, whether it will happen or not.’

The expert also mapped out ways in which the government could reduce this threat in future.

’I can’t see how the next government wouldn’t deal with the issue – cut back spending and rein in the public debt and finances,’ Mr Ohanissian commented.

Sterling has enjoyed a rally on the currency markets recently, coming off a January low of $1.35 against the dollar to pass $1.60 last week.ADNFCR-2318-ID-19198256-ADNFCR