Dollar, pound under German siege Britons are fearful of being hit with high interest rates

August 26, 1992|By Richard O'Mara | Richard O'Mara,London Bureau

LONDON -- It's the battle of Britain all over again, but this time it's not the island under siege, but the island's currency, the pound.

The casualties of this battle will not be the speculators fomenting it, but the rank and file -- average Britons trying to buy houses, keep up their mortgage payments, run their businesses, start new ones or even keep their jobs.

For a year and a half now the people here have been assured by their political leaders that economic recovery is just around the corner. The Conservatives won the general election on that promise in April.

But few believe these reassurances any longer. All the indicators point in the opposite direction.

How bad is it? To begin with, the current recession is the longest to grip Britain since the downturn of the 1930s. The country is approaching its third consecutive year of decline.

Unemployment stands at the highest level in five years. More than 2.7 million Britons are on the dole.

The housing market, a keystone in the economy, is in disarray. Real estate values are falling all over the country. About 10 million Britons today own houses that are not worth the amount of their mortgages.

Some 65,000 homes are expected to be repossessed by banks this year. According to the Joseph Rowntree Trust, a think tank that deals with housing matters, 40,000 homes have been abandoned by people unable to meet their payments.

Britain's trade gap continues to widen, and businesses are failing at a record rate. Yesterday, the London stock market slid to its lowest level in more than a year. The Financial Times Stock Exchange index of 100 stocks closed down 30.1 points, or 1.30 percent, at 2,281.0, its lowest close since Feb. 14, 1991.

Now, the pressure on the pound threatens to make all this even worse. It has generated expectations over the past few days that the government will be forced to raise interest rates to prevent the pound from slipping further in its relationship to the German mark.

Prime Minister John Major has committed his government to keeping the pound within its band in Europe's Exchange Rate Mechanism, which is to maintain a pound that will buy 2.778 marks or more -- but no fewer.

This has become increasingly difficult. Because the value of the dollar is falling, more and more money is flowing to Germany, where interest rates are high and investment earnings greater. This is pushing up the value of the mark, thus making it harder for the pound to maintain its position with regard to the benchmark German currency.

All this might be so much fog to the average Briton, but he knows one thing: If interest rates are raised in Britain -- as many financial experts think they will be, possibly before September -- the cost of obtaining a mortgage, or even keeping up with one, will grow accordingly.

Why all the pressure on the pound now?

First there is the dollar's decline, owing to economic apprehensions in the United States and the consequences of that decline.

Second, there is the general awareness that no certain end to the recession can be seen. The Tories have traded in hopeful expectations for 18 months now, but it's a commodity nobody's buying any longer.

Finally, there is a more definitive fear clouding the immediate future. It is the fear that the Maastricht Treaty of European political and monetary union might be vetoed by the French electorate next month.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.