How Will the EFSF Downgrades Affect the Pound

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How Will the U.K. General Election Affect the Pound?

June 5, 2020

With the U.K. general election taking place this week, all eyes are on the polls. In recent weeks, Labour has made noticeable gains to the previously uncontested Tory lead in this election.

When Theresa May called the snap election in April, markets were confident the result would be a significant Tory majority; strengthening May’s position and giving her a mandate as Prime Minister of the United Kingdom.

Despite receiving a boost after Theresa May announced her snap general election, the British pound continues to experience volatility correlated to polling results and sensational international politics. The impromptu election was expected to be a simple win for the Conservatives, but nothing has gone to plan. Since the beginning of May 2020, Labour has gained nearly 10% in recent polls, and some of those gains have been at the Conservatives’ expense. 1

What Does a Hung Parliament Mean for the Pound?

Labour’s fringe leader, Jeremy Corbyn, who has spent most of his career opposing other Labour leaders, seems too extreme to capture any middle ground. That’s why Theresa May is considered the safer bet, but her post-Brexit vision remains unclear, which means many are worried that this election may result in a surprise ending just as the Brexit referendum did one year ago. The alternative to the two is a possible hung parliament.

A hung parliament means neither party has a majority in the House of Commons. Last week, YouGov released a poll suggesting a hung parliament would be the most likely outcome of the election, and the pound subsequently dropped to below $1.28. Why? Because the geo-political context matters more than ever right now. With Brexit negotiations looming, investors are seeking clear intentions from Britain.

Is the Pound Going to Drop?

The uncertainty in terms of how Brexit will unfold and therefore, how it may affect the British economy long term, is not an easy call for investors to make. It seems many investors are avoiding the question altogether by investing elsewhere. This could have protracted effects on the value of the pound.

Many believe that a Conservative win in parliament would bring some certainty to Brexit negotiations and may bolster the pound accordingly to $1.31 USD and €1.18 EUR. A Labour win may have an opposite, and profoundly more dramatic, effect.

But investors aren’t looking just internally at the U.K. External factors make a substantive difference in this case, as the U.K may be headed for increasingly antagonistic relationships with both the U.S. and the eurozone. Consider the context:

  1. Donald Trump seemingly executes policy on his personal whims with little willingness to factor in existing partnerships and agreements.
  2. France and the Netherlands just elected pro-Europe leaders.
  3. Germany is headed for a major election within months, the result of which may solidify the alliances in continental Europe leaving the U.K. at a considerable disadvantage during Brexit negotiations.

Is the Pound Stronger than the Euro?

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Fitch downgrades five eurozone nations

The credit ratings agency Fitch has downgraded five eurozone countries, with a double-drop for the major economies of Italy and Spain. The move, ahead of an EU summit on Monday, comes soon after another mass downgrade.

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Fitch said it had considered both positives and negatives

Credit ratings agency Fitch on Friday downgraded its credit outlook for five eurozone countries, citing financing and growth fears as its reasons.

The ratings of major economies Italy and Spain dropped by two notches; Italy from A+ to A- and Spain from A to AA- status.

There was also a downgrade of two points for Slovenia, with Belgium and Cyprus both falling by one. The agency said that although governments had taken action on a national level to dispel market fears, it also had to take a poor economic outlook into account.

“Today’s rating actions balance the marked deterioration in the economic outlook with both the substantive policy initiatives at the national level to address macro-financial and fiscal imbalances,” said a statement on the website of US-based Fitch.

The agency also highlighted a collective failure to reach agreement on the wider eurozone crisis as a further motivation for the downgrade.

A poor economic outlook for the eurozone was given as just one reason

“The intensification of the eurozone crisis in the latter half of last year undermined the effectiveness of ECB monetary policy and highlighted the financing risks faced by eurozone.”

Narrow escape for Ireland

Ireland maintained its triple-B rating, but was placed on Fitch’s “negative outlook” list – indicating the likelihood of a future downgrade.

The announcement comes ahead of a European Union summit on Monday, aimed at finding a solution to mounting debt and poor growth.

Earlier this month, ratings agency Standard & Poor’s (S&P) downgraded nine European countries, with France and Austria losing their top-notch triple-A ratings.

Italy, Spain, Portugal and Cyprus went down by two levels on the S&P scale, while Malta, Slovakia, and Slovenia each fell by one.

Author: Richard Connor (AFP, AP, dpa)
Editor: Nancy Isenson

DW recommends

Readers consider the efficacy of ratings agencies

After Standard and Poor’s credit ratings agency downgraded the EU’s emergency euro fund, the EFSF, readers wrote in with their take on the situation. (18.01.2020)

Standard & Poor’s downgrades EU bailout fund

Credit ratings agency Standard & Poor’s has downgraded the EU bailout fund by one notch after a series of national downgrades. The agency said that with the right assurances it would reverse the decision. (17.01.2020)

Eurozone crisis brings little New Year cheer

After a year dominated by economic woes, European leaders have set out plans to curtail the spiraling eurozone debt crisis. Yet as the New Year looms it doesn’t look like 2020 will be any easier. (01.01.2020)

  • Date 27.01.2020
  • Related SubjectsSpain, Italy, Cyprus, Slovenia
  • KeywordsFitch, S&P, ratings, credit, Belgium, Italy, Spain, Cyprus, Slovenia, eurozone
  • PrintPrint this page
  • Permalink https://p.dw.com/p/13sDv

Opinion: EU must address pandemic’s effects on economies 08.04.2020

Eurozone finance ministers broke off talks on measures to address the effects of the coronavirus pandemic on national economies. This is no ordinary EU drama, DW’s Bernd Riegert writes: This time, there is much at stake.

Coronavirus latest: Over 90 countries request emergency funds 03.04.2020

The International Monetary Fund has said it received requests for emergency financing from over 90 countries struggling to cope with the effects of the coronavirus pandemic. Follow DW for the latest.

Coronavirus latest: More than 750,000 cases across the globe 30.03.2020

Italy is the second country, after the US, to record more than 100,000 cases. Globally, more than 35,000 people have died. Follow DW for the latest.

Bloomberg

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