Sterling’s fall is full of irony 30 years after Black Wednesday | Business news

Disappointing retail sales figures for August, which were published on Friday, sent the pound to a 37-year low.

at one point, Sterling pound It was trading at $1.1348, a level not seen since March 1985.

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

Against the euro, meanwhile, the pound fell to as low as 1.1405 euros, a depth that hasn’t fallen since February last year.

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

But the timing of the recent drop is riddled with irony for long-term watchers of sterling – because today, Friday, marks the 30th anniversary of one of the most painful days in sterling’s post-war history.

Wednesday, September 16, 1992 is known as “Black Wednesday” and no one working in the markets at that time will ever forget it.

It saw the Bank of England burn nearly £10 billion in reserves, a huge amount at the time, while interest rates were raised twice during the day – all in a failed attempt to prop up the value of the pound.

However, the consequences were more far-reaching. Black Wednesday was the day the Tory government’s hard-earned reputation for economic efficiency was burnt.

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

The Black Wednesday background is worth going into detail.

At the time, the pound was subject to the European Exchange Rate Mechanism (ERM) – the system that tied the currencies of various European countries together before the creation of the euro. Under the exchange rate mechanism system, currencies such as the French franc, Italian lira, German mark or the British pound were supposed to trade with each other in a narrow range, described as “currency convergence”.

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

Since the British pound joined the exchange rate mechanism at a rate of 2.95 DM to the pound, this means that it was not supposed to trade at more than 3.127 DM or less than 2.773 DM. The main means by which the British pound was supposed to trade in such a narrow range against the brand was basically by setting UK interest rates (set by the government in those days and not the Bank of England) close to the level set by the Bundesbank. (Bundesbank).

If the pound appeared to be moving outside this range, the Bank of England would have stepped in, buying or selling sterling so that the exchange rate would return on the terms set by the exchange rate mechanism.

Most people thought that the pound had entered the exchange rate mechanism at a very high rate against the German mark – and this created a huge opportunity for currency speculators like George Soros.

George Soros responds to critics about the donation
George Soros, who was filmed in 2012, was holding a huge sterling short position that made big profits.

They discovered that it was completely inappropriate for the UK and Germany to have interest rates at similar levels: the UK needed lower rates as it was emerging from recession and house price crashes while Germany needed higher rates to get rid of the threat. from rising inflation resulting from the massive spending that followed reunification between East and West Germany.

The speculators were already in good shape: there were plenty of other strains in the economic resettlement mechanism, after a referendum in Denmark earlier that year in which the Danes rejected the Maastricht Treaty – the treaty that was supposed to pave the way for closer European integration and the creation of the euro in the end.

France had also announced a referendum on the treaty and a number of other currencies, notably the lira, circulated close to the limits of the band under which it was supposed to take place.

These tensions came to a head when earlier in the month British chancellor Norman Lamont had a very public argument with Helmut Schlesinger, head of the powerful Bundesbank. Things got worse when, on September 15, Mr. Schlesinger made some unprotected comments in a newspaper that were interpreted in some quarters as speculation that the pound should fall – as the lira had already been forced out days before.

Mr Schlesinger insisted that was not his intention and wrote in 2017: “I regret to this day that a general remark to me, not specifically focused on sterling, should have played a role in worsening sterling’s position.”

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

Sterling crisis: Traders at Westminster National Bank in the City of London are watching currency fluctuations in the wake of the Treasury Secretary's statement.  Read Less Photo: Neil Munz / PA Archives / PA Images Taken: August 26, 1992
Traders react to a drop in sterling at the city’s Westminster National Bank in September 1992

The next day, sterling experienced wave after sell-off, which prompted Lamont at 11 am to raise interest rates from 10% to 12%, and then three hours later, from 12% to 15%.

Huge spending by the bank, using what was believed at the time to be half of the UK’s foreign exchange reserves, failed to stem the tide.

Lamont announced that night that sterling would be suspended from the exchange rate mechanism, and a second rate hike, to 15%, would not proceed.

PA News Photo 26/8/92 Chancellor Norman Lamont giving his statement at the Treasury in London Photo: James C. James / PA Archives / PA Photos Date of capture:
Norman Lamont took the UK out of the risk management mechanism in September 1992

It was an insult to John Major’s conservative government as much as the devaluation of sterling in 1967 was to Harold Wilson’s Labor government. She was defeated by Tony Blair in the subsequent general election.

Sterling’s suspension from the Risk Adjustment Mechanism ensured that the UK never entered the single currency – while the devaluation of its currency paved the way for a robust recovery ensuring that Labor inherited a strong economy when it came to power. Some economists now refer to it as “Golden Wednesday”.

But Black Wednesday not only paved the way for Labor’s electoral victory five years later. Many now see it as the moment the Conservatives’ wariness of the European Union has turned into complete suspicion of the European Union.

As Schlesinger himself wrote in 2017, “One might see this as the beginning of the UK’s slow separation from the European Union that culminated in last year’s Brexit vote.”

Meanwhile, there was a response in Europe. Sterling’s shameful departure from the risk management mechanism has been in the minds.

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

European governments concluded that their planned integration was weak as long as it relied on the exchange rate mechanism – especially as the episode highlighted the Bundesbank’s reluctance to take action to defend currency ranges.

They have stepped up their moves towards the creation of the euro.