UK unlikely to suffer debt crisis, pound crisis: HSBC currency strategist Paul Mackel

The UK is unlikely to suffer a debt crisis and pound crisis, said Paul Mackel, Director of Currency Strategy, HSBC.

He told Xinhua in a recent interview that the levels of debt in the UK are very high and also very high on a number of other countries right now. "So it is hard to become very concerned about the situation in the UK. Fiscal concerns are evident in many of the major economies at the moment," he said.

Greece-style debt crisis unlikely in UK

As predicted by the Treasury, the public deficit would reach a record high 178 billion pounds (about 270 billion U.S. dollars) in the 2010-2011 fiscal year, equal to more than 12 percent of the UK 's gross domestic product (GDP).

The British government has planned to cut the deficit to 4.7 percent of GDP in the fiscal year 2014-2015, which is higher than the cap of 3 percent set by the European Union.

However, Mackel said, "I don't think that there will be a debt crisis. The demand for gilts has been relatively strong, so I don' t really buy into the crisis scenario in the UK."

The Chancellor, Alistair Darling, will present his third and possibly final, budget statement to parliament on March 24. It is expected that he would forecast the deficit for the fiscal year of 2011-2012 and announce measures to reduce the deficit.

When asked whether the UK would suffer a Greece-style debt crisis, Mackel said that the UK is in a different situation where it has a very liquid and big bond market compared with some of the small peripheral European countries. "That is to certain extent an advantage for the UK," he added.

The UK has had greater currency flexibility compared to some of the weaker members of the Eurozone, he said. "This crisis has taught us some important lessons and having currency flexibility has helped out incredibly."

Greece is now still in a need for an effective solution for its debt crisis. "We can't focus purely on the situation in the UK. We have a very big fiscal deficit in Japan or even a very big fiscal deficit in the U.S.," he said.

In his view, the pending general election is a key reason for investors to be worried that a debt crisis would emerge in the UK. "Both the Labour and Conservative parties seem to have a sense of wanting to reduce a fiscal drag on the economy," he said.

Pound suffers temporary weakness but not crisis

Mackel told Xinhua that the pound would unlikely suffer a crisis but it would remain weak for a while.

According to him, the primary reason for the weakness of pound is the election uncertainty. "The markets do not like political uncertainty because if it happens, you wonder how the government is trying to improve the outlook for the economy or trying to improve the fiscal position," he said.

On March 1, the pound against U.S. dollars broke through the key 1.5 U.S. dollars level and tumbled to as low as 1.47 U.S. dollars, a 10-month low. The pound has dropped 6.9 percent since the beginning of this year on speculation that a budget gap will damage the currency.

As for other reasons, Mackel said that some of the language coming out from the Bank of England has been airing on the dovish side so the markets had to think differently with regard to inflation in this economy. Also some of the language from the Bank has been suggesting once again a weak pound is quite good for exporters and will help the economy.

With regards to the prospects of pound, he said that the outlook for sterling would be "constructive". "The currency will start to recover in the second half of this year," he added.

He explained that there would be a relief in the currency market once the political uncertainty starts to calm down. "If there was a hung parliament in the UK, it doesn't necessarily mean that it should be bad for the currency," he said.

Back in February 1974, he said there was a hung parliament and actually sterling did okay but held up reasonably well.

[Source: Xinhua, London, 15Mar10]

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