Sterling’s plunge is loaded with irony 30 years after Black Wednesday

Disappointing retail sales figures for August, released on Friday, pushed the pound to a new 37-year low.

At one point, sterling was trading at $1.1348, a level not seen since March 1985.

The pound has fallen nearly 16% against the US dollar over the past year.

Against the euro, the pound fell to €1.1405, a depth not seen since February last year.

This weakness in sterling comes despite the fact that the Bank of England has been raise interest rates more aggressively than some other central banks around the world, but not, above all, the US Federal Reserve.

But the timing of the latest drop is fraught with irony for long-term observers of the pound – as today, Friday, marks the 30th anniversary of one of the most traumatic days in history according to -pound war.

Wednesday, September 16, 1992 is better known as “Black Wednesday” and no one will ever forget it in the markets back then.

It saw the Bank of England burn nearly £10bn of reserves, a huge sum at the time, while interest rates were raised twice during the day – all in an attempt unsuccessful to support the value of the pound.

The consequences, however, were greater than that. Black Wednesday was the day the Conservative government’s painstakingly built reputation for economic competence was incinerated.

In that sense, it was the moment that paved the way for the election of a Labor government – ​​the first in 18 years – in 1997.

The context of Black Wednesday deserves to be detailed.

At the time, the pound was part of the European Exchange Rate Mechanism (ERM) – the system that brought together the currencies of various European countries before the creation of the euro. Under the ERM, currencies such as the French franc, the Italian lira, the German deutschemark or the pound were supposed to trade with each other within a narrow range, referred to as “currency convergence”.

In the case of the pound, it was supposed to move against the deutschemark by no more than 6%.

As the pound had joined the ERM at a rate of DM 2.95 to the pound, this meant that it was not expected to trade above DM 3.127 or below DM 2.773. The primary means by which the pound sterling was supposed to trade in such a tight range against the mark was primarily to fix UK interest rates (which at the time were set by the government and not by the Bank of England) close to the level set by the German Bundesbank. .

If the pound appeared to break out of this range, the Bank of England was supposed to intervene, buying or selling the pound until the exchange rate returned to the conditions set by the ERM.

Most people thought the pound had entered the ERM at too high a valuation against the Deutsche Mark – and that created a huge opportunity for currency speculators such as George Soros.

Image:
George Soros, pictured in 2012, held a huge sterling short position which generated big profits

They had noticed that it was totally inappropriate for the UK and Germany to have interest rates at similar levels: the UK needed lower interest rates because it was coming out of a recession and a slump in property prices, while Germany needed higher interest rates to weather the threat. higher inflation created by the heavy expenditures that followed the reunification between East Germany and West Germany.

Speculators already had their heads held high: there were many other tensions in the ERM, following a referendum in Denmark earlier this year, in which the Danes rejected the Maastricht Treaty – the treaty supposed to pave the way for closer European integration and the eventual creation of the euro.

France had also announced a referendum on the treaty and a number of other currencies, notably the lira, were trading close to the limits of the range in which they were supposed to trade.

These tensions came to a head when, earlier in the month, British Chancellor Norman Lamont had a very public row with Helmut Schlesinger, president of the powerful Bundesbank. Things got worse when, on September 15, Mr Schlesinger made reckless comments to a newspaper which were interpreted by some as speculation about the need to devalue the pound – as indeed the lira had been forced to do. Few days ago.

Mr Schlesinger insisted that was not his intention and wrote in 2017: “I regret to this day that one of my general remarks, not focused specifically on the book, played a role in the worsening of the situation of the pound sterling”.

But the damage was done. Speculators like Mr Soros – who is believed to have made more than £1bn in profit from the event – had already sold sterling in anticipation of devaluation and, by the time Wall Street closed that evening, the pound had fallen below its ERM. floor.

Image:
Traders react to the fall of sterling at the National Westminster Bank in the City in September 1992

The following day, the pound was hit by wave after wave of selling, prompting Mr Lamont at 11am to raise interest rates from 10% to 12% and then, three hours later, from 12% to 15%.

The bank’s heavy spending, using what was considered at the time half of the UK’s foreign currency reserves, failed to stem the tide.

Mr Lamont announced that night that sterling’s membership of the ERM would be suspended and the second interest rate hike, to 15%, would not take place.

PA News Photo 26/8/92 Chancellor Norman Lamont makes his statement to the Treasury in London Photo by: JAMES JIM JAMES/PA Archive/PA Images Date Taken:
Image:
Norman Lamont pulled the UK out of the ERM in September 1992

It was as much a humiliation for the Conservative government of John Major as the devaluation of the pound sterling in 1967 had been for the Labor government of Harold Wilson. He was defeated by Tony Blair in the subsequent general election.

The suspension of sterling from the ERM ensured that the UK will never enter the single currency – while its devaluation paved the way for a strong recovery which assured Labor of the legacy of a strong economy when came to power. Some economists now call it the “Golden Wednesday”.

But Black Wednesday not only paved the way for Labor’s election victory five years later. Many now also see it as the moment when conservative distrust of the EU morphed into full-fledged Euroscepticism.

As Mr Schlesinger himself wrote in 2017: “This could be seen as the start of the UK’s slow separation from the EU that culminated in the Brexit vote last year.”

In Europe, meanwhile, there was also a response. The ignominious departure of Sterling from the ERM concentrated the spirits.

The French public, a few days later, voted in favor of the Maastricht Treaty.

And European governments concluded that their integration project was vulnerable as long as it depended on the ERM – especially as the episode highlighted the Bundesbank’s reluctance to take action to defend the currency bands.

They accelerated the steps towards the creation of the euro.

. dive sterling is loaded dirony years after wednesday black news economic

. Sterlings plunge loaded irony years Black Wednesday

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