There was a story in The Telegraph yesterday that might presage real problems for the UK economy (HERE). It's about the selling off of government bonds by foreign investors. Apparently, a net £17.2 billion of UK government bonds, known as gilts, were sold in July, the biggest monthly outflow on the Bank of England’s records which date back to 1982.
The two sides of the trade equation MUST balance. When there's a gap, as there is now and as there has been for years, the difference must be made up either by money flowing in from abroad OR by a fall in the value of sterling. Up to now money has always come in from foreign investment, either in gilts or the purchase of property or UK companies. A fall in the value of the pound makes the last two items more attractive.
If foreign investors are shunning Britain because of Brexit, this might be a big problem. The report says:
"It [the selling off of gilts] comes after Bank of America Merrill Lynch warned that foreign central banks and sovereign wealth funds could dump up to £100bn of UK assets if Brexit talks break down.
"The US bank’s analysts fear such a rout could send sterling down from its current level of $1.30 to as low as $1.10, a low not seen for decades.
"If major investors do ditch sterling assets it could cause a “protracted current account crisis,” BAML warned".
Brexit is starting to have major unforeseen consequences.
