Читать книгу Foreign Exchange: The Complete Deal - James McDowell. Sharpe - Страница 18

The sterling demise had been coming for some time; rising deficits, rampant inflation, political gridlock and industrial unrest on a grand scale (for example, the miners’ strike) had become features of the 1970s. In December 1973 Idi Amin, the Ugandan dictator, launched a Save Britain Fund and even offered emergency food supplies. Unemployment was also rising and in January 1975 breached the psychological barrier of one million.

The events of 1976 that lead up to the sterling collapse can provide useful insights into the situation facing European economies in the early years of the 21st century: attempting to control public deficits while supporting demand. A lesson then, as now, was that material changes in policy may not arrive soon enough to placate the markets. The problems in Ireland, Greece, Spain and the UK, to name but a few, did not appear overnight but politicians, the financial press and economists were slow to conclude that previous policies were unsustainable and this was the same in 1976.

In the 1976 crisis the turning point in policy came as late as the beginning of 1975. As the then Chancellor, Denis Healey, wrote: “I abandoned Keynesianism in 1975.” As we saw with Ireland and Greece, action was forced on them as borrowing costs rose to extreme heights; and for Greece in particular borrowing was nearly impossible. A common trait of politicians both this century and the last is that they are loathe to admit to any crisis and so policy shifts are inevitably late in coming. Edmund Dell captured this speaking after the February 1974 election. He said: “Some ministers seemed unconscious of the economic crisis that had struck the country. Their attitude resembled that of characters in Jane Austen’s novels who carried on their lives undisturbed by the Napoleonic Wars.”

Crises tend to build on small events. In the 1976 crisis the cracks started to appear on 9 March 1976 when Nigeria announced its intention to diversify its foreign exchange reserves, which for historical reasons were heavily weighted towards sterling. The following day the Labour government lost a House of Commons vote on public expenditure cuts designed to win support from the IMF (the UK had made an application to the IMF for a standby facility). Despite winning a confidence vote on 11 March 1976 the Prime Minister decided to resign a few days later on 16 March. Sterling was now on the run despite intervention, and interest rates reached 15% on 6 October. The scale of the sterling collapse was immense. GBP/USD fell from above 2.40 in April 1975 to just below 1.60 in November 1976 and GBP/DEM (Deutschmark) from 6.10 to around 3.90 over the same period.

On 7 June the UK announced a $5.3bn six-month credit facility from other central banks, $2bn of which came from the US central bank. However, the US imposed a payment deadline of 9 December 1976. The UK was unable to meet this condition, which prompted the application to the IMF for a standby loan of $3.9bn on 29 September 1976. The US position was hardly supportive but has echoes of Germany today – they were unwilling to bail out a country with flawed economic policies. Cuts in UK public spending inevitably followed.

The notion that Ireland or Greece would have been saved by devaluation is an illusion. Their debt levels were extremely high and their ability to borrow extremely low. As was graphically seen in 1976, a falling currency severely impacts on inflation and any flexibility on domestic monetary policy.