BLBG: Pound Priced for U.K. Debt-Rating Cut, Merrill Says (Update2)
The pound is trading at levels that indicate Britain may lose its AAA credit rating as the government increases borrowing to pull the economy out of its first recession in 17 years, according to Merrill Lynch & Co.
“The market is now pricing the pound in expectation of a downgrade,” Merrill Lynch strategists including Emma Lawson in London wrote in a report today. “The pressure” is “on the U.K.,” the analysts wrote.
The British currency traded near a record low against the yen and close to the lowest level versus the dollar since 1985 on speculation the government will take control of some of the nation’s banks. Bank of England Governor Mervyn King said this week officials may start buying assets to bolster lending and Prime Minister Gordon Brown announced his second rescue plan in three months.
The pound fell 1.2 percent to $1.3782 as of 2:26 p.m. in London. It was 2.4 percent lower at 121.86 yen, from 124.88 yesterday. The currency declined for a fifth consecutive day against the euro.
Ballooning budget deficits in Europe are spurring ratings companies to cut sovereign debt grades. Portugal’s credit rating was lowered yesterday by Standard & Poor’s in the third downgrade of a euro-area government in a week. Spain and Greece also had their debt classifications lowered.
Bullish on Sterling
UBS AG and Goldman Sachs Group Inc. said yesterday the British currency may be poised to recover.
“A lot of negative news has already been priced into sterling,” Brian Kim, a strategist in Stamford, Connecticut, at UBS, the world’s second-biggest currency trader, wrote in a report yesterday. “We would stress caution before chasing further moves to the downside, especially on the euro axis.”
Investors should keep betting the pound and gilts will rise because the U.K.’s slump is being overplayed, Goldman Sachs said.
“We’re bullish the pound and gilts,” Thomas Stolper, a Goldman Sachs economist in London, said. “The likelihood of a near-term improvement in business activity suggests sterling could bounce back quite quickly,” he wrote in a report. “We therefore stick to our guns and remain long sterling.”
Royal Bank of Scotland Group Plc slumped 67 percent in London trading on Jan. 19 on concern the government may have to take full control of the bank after the lender forecast the biggest loss reported by a U.K. company. The government offered to exchange its preference shares in the bank for ordinary stock, a move that may increase its stake to 70 percent from 58 percent.
The Bank of England may acquire securities such as corporate bonds and commercial paper to boost lending to companies and consumers, King said in a speech on Jan. 20.
