Brace yourselves

 Brace yourselves

Ireland about to get even dearer as sterling falls

By Bernard Purcell

With less than three months to go to the 23 June referendum Brexit worries pushed Sterling to one of its lowest points in years.

Uncertainty, a record post-war current account deficit, and poor manufacturing output figures meant the euro is now worth just short of 80 pence sterling, with further falls in sterling’s value anticipated by traders.

As a consequence the cost of buying protection against further plunges in the value of sterling soared to levels higher than those seen during the 2008 financial crisis. This market pricing suggests investors believe the risk of a slump in sterling is much greater than a bounce.

Sterling has fallen nearly 6 per cent this year alone. Credit ratings agency Standard & Poor predicted that if the UK does leave the EU it will see its AAA rating reduced to AA, with obvious consequences for the currency. But there are nevertheless some – a minority at the moment – who believe the markets have behaved so cautiously sterling will not actually fall much further.

Competing opinion polls show the pro- and anti-EU sides are neck and neck with the fate of this summer’s referendum in the hands of the undecided. But for people with interests and commitments in the eurozone – such as the vast majority of Irish people and businesses in this country – weeks and months of currency uncertainty lie ahead.

Two of the most recent opinion polls showed just how tight the margins are: Opinium’s for The Observer claimed 43 per cent support Britain leaving the EU and 39 per cent support staying. An earlier online poll by TNS at the end of last week said the two sides were neck and neck.

Bookies, meanwhile, believe there is only a one in three chance of the UK leaving the EU.

The uncertainty is giving sterling a hammering, its value against a basket of other currencies at its worst since late 2008 as speculators increased betting against the pound.

Speculators are betting on one of two outcomes: if UK voters back Brexit they expect sterling to plunge. If they vote to stay, they expect sterling to rise in value.

Either way, they expect the Bank of England to raise UK interest rates by year’s end – but probably by much more than expected if sterling falls as dramatically as feared should Brexit win.

Despite talk by chancellor George Osborne or Britain’s ‘economic recovery’ sterling is also hobbled by its dependence on huge foreign investment flows needed to fund the UK’s record breaking current account deficit, one of the biggest in the developing world, at around 5 per cent of gross domestic product – the most since records began in 1955. Excluding times of war, it is the largest such deficit since 1772.

The past few governments’ dependence – including this one, especially – on credit-fuelled consumer binge spending, low levels of manufacturing for export, low savings, and a potentially explosive buy-to-let market all leave this country at as great a risk as happened in 2008 should the global economy crash.

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