Markets watch for clear British election outcome

9th May 2010, Comments 0 comments

Already jittery markets will reopen Monday hoping for a decisive outcome from Britain's post-election talks to form a stable government that can tackle the deficit and secure economic recovery.

The opposition Conservatives won the most seats but no parliamentary majority in Thursday's general election, leaving Britain in limbo, as the FTSE 100 fell and the pound crashed to a 13-month low against the dollar.

Stocks and sterling recovered some of their losses by the end of the day, after Conservative leader David Cameron began possible power-sharing talks with Nick Clegg, leader of the smaller opposition Liberal Democrats.

But the two leaders will be acutely aware that if the political uncertainty is prolonged, it could precipitate a further fall in the currency and stock markets, already highly volatile because of the Greek debt crisis.

"Horsetrading and deliberation will increase the pressure on the pound," said Phil McHugh, a dealer at Currencies Direct, adding that on the other hand any deal between the Tories and the Lib Dems could cause the pound to bounce.

"The financial markets and credit rating agencies will want to see action on UK fiscal policy as a matter of priority," he said, while "procrastination and disagreement will lead us towards the path of a sovereign downgrade."

Prime Minister Gordon Brown -- whose Labour Party will remain in power while negotiations continue, despite coming second in the polls -- sought to reassure the markets Friday that someone was still running the show.

It was business as usual for finance minister Alistair Darling on Sunday as he attended a key EU meeting in Brussels to discuss a new crisis fund for debt-saddled euro economies in the wake of Greece's woes.

Darling told Sky News television that Britain cannot and will not support such a bailout fund as it is the responsibility of the eurozone countries.

Tory leader Cameron emphasised the "great seriousness" of the economic situation facing Britain after a long and deep recession which has left the country grappling with a record public deficit.

"We need a government that reassures the international markets," Cameron said.

Lib Dem deputy leader Vince Cable, a former chief economist for oil giant Shell, emphasised the risks, saying that if the parties could reach a deal, Britain would be seen as "strong and united".

"But if squabbling and short-term manoeuvring dominate, we could be sucked into a downward spiral of falling confidence and decline," he wrote in the Mail on Sunday.

However, the hung parliament was not a huge surprise. Opinion polls had been pointing to a tight election for weeks and the markets will have factored in some delay in the formation of a new government.

Ratings agencies Moody's and Standard and Poor's kept their top-level credit ratings for the British economy after the election results were announced, saying a hung parliament in itself was not a problem.

One reason for calm is that the Conservatives, Labour and the Lib Dems have all pledged to tackle the deficit by slashing public spending, although they vary on timing, with the Tories wanting to start now and the others in 2011.

Many analysts say it is more important to get a quick deal to form a stable government, regardless of whether the Tories agree a deal with the Lib Dems, or the Lib Dems resort to teaming up with Labour.

"What we need is clarity of leadership as to where we're going to be taken," Jim O'Neill, chief economist at Goldman Sachs, told BBC radio.

Some commentators are mulling the possibility of a fresh election if no deal is reached, and this would only bring more uncertainty for the markets and delay the introduction of any firm programme to tackle the deficit.

"The UK's route to economic recovery needs to be firmly established," said Richard Lambert, director-general of the CBI business lobby group. "The next few days will be critical."

Much also depends on the European Union agreeing a deal on the crisis fund, which is designed to head off market predators threatening the eurozone as the Greek crisis continues to send shockwaves through markets.

"If that fails, then the whole global market will open on Monday in a really fragile state," O'Neill said, and any further uncertainty caused by Britain's politicians could create a situation that is "pretty ugly".

© 2010 AFP

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