Britain’s inconclusive election outcome has had a major negative effect on UK shares and government bonds as well as the value of the pound.
The failure of the opposition Conservatives to win an overall majority means they may not have the political power to tackle Britain’s biggest ever budget deficit, which is running at more than 11 percent of GDP.
The pound hit a one year low against the dollar and fell steeply against the euro.
With some exceptions, in the recent past, the pound has fallen against the dollar with the election of a Conservative government, but sterling did perk up a bit after Nick Clegg, the leader of the third largest party, the Liberal Democrats, indicated he would be willing to work with the Conservatives.
Whoever ends up running the country will have to make hard decision on cutting the deficit and curbing state borrowing.
This election result couldn’t have come at a worse possible time in terms of the British economy. The incoming government is going to have to make massive spending cuts, Britain is saddled with some of the highest debt levels in Europe. The financial markets hate that kind of political uncertainty, they want stability, that is why they are selling off of shares, the pound, and UK government bonds.”
As well as domestic problems, the new government may also face pressure to help its European neighbours.
David Rennie of The Economist told euronews: “I wonder whether Britain would be allowed to sit on the sidelines with its arms folded and say: we are not going to contribute a cent towards that bailout. Now if Europe comes to Britain and says – ‘start bailing out euro zone countries’ then, whether the Tories, Lib-Dems or Labour like it or not, I predict a big fight between Britain and the EU.”
But for the moment, the longer a coalition deal takes, with days or even weeks of horse-trading, the more difficult it will be for Britain to borrow the money it needs and the greater the risk to its AAA credit rating.