Currency expert Boris Schlossberg says hung parliament a "formula for disaster"

In an interview with IBTimes, Mr Schlossberg, who is Director of Currency Research at GFT Global Markets, said that with its high levels of debt and a weak economic recovery, Britain “is walking a very thin line financially... [and] is probably the greatest sovereign debt risk in the G20 universe”.

He said, “If you look at the recovery rates of all the G20 nations, UK is the slowest, the worst. It only came out of recession last quarter and it came out on a measly one tenth of a basis point. Every other economy – as bad as it is – is doing much better than the UK. The UK is incredibly vulnerable to [problems in] financial services. The problem with the UK economy is that it is effectively a hedge fund economy. There is nothing besides finance (and maybe tourism) within the UK and that creates and incredibly difficult position for policymakers.

“I was watching one of the placement recruitment companies and they said the only sector where they are seeing strong growth is in the pharmaceuticals and biotechnology. I think the challenge to the UK economy is to basically invent another sector that is going to have a lot of growth.

“You do seem to have a lot of promise here because a lot of pharmaceuticals have relocated here and they have attracted a lot of talent. But you really have to have some sort of growth industry aside from finance because it’s too finance dependent. What happens with the UK economy is that because it is so finance dependent it really swings up and down with the Dow Jones industrial average for all intents and purposes. So we get into the situation where if equity markets across the world begin to stall an actually decline its’ going to be a vicious double whammy. Whatever revenue the UK government is raising right now it’s raising out of the financial sector, those revenues are going to be crippled completely once the markets decline and that could create a true sovereign debt disaster scenario for the UK – that’s why the pound is one of the weakest currencies on the board right now and it continues to be so until people begin to feel that there is some sort of structural reform that’s going to happen in the system.”

The pound, he said, was not being helped by opinion polls ahead of the general election, due in the next few weeks. While last year polls had consistently shown a clear victory for the Conservative party, in recent weeks their lead has shrivelled to as little as two points, suggesting no overall winner in the election.

Mr Schlossberg said, “Politics matters hugely to currency markets. A hung parliament – which appears to be a stronger possibility than most people thought, is certainly going to be a problem for the pound. If you have political stagnation and economic recession it is a formula for disaster so I think the markets are beginning to be concerned.”

Despite Britain’s reliance on financial services, Mr Schlossberg dismissed concerns that heavy taxation on bankers and their bonuses introduced by the government would drive bankers and their tax revenue to other countries and cause problems for the British economy. However he added that for Britain to experience a stronger recovery it would also need the public sector to be reduced in size.

He said, “[Heavily taxing bankers] is a difficult issue because the bottom line is that government has to raise money somewhere and governments are going to go where the money is. So if the financial sector recovers and makes money, that’s where they are going to get it. They are not going to get it from manufacturing or agriculture – there is no money there.

“Cry all they want, if bankers are making money, they are going to have to give it up – they have no choice. The greater problem is that 51 per cent of UK GDP is driven by public finances – in other words private industry accounts for less than half of UK GDP and that’s an incredibly high proportion – it suggests massive amounts of inefficiency in the system – so privatisation of maybe a lot of public services is going to be necessary in order to stimulate some growth and demand here.”