Expat Village is edited and published by
Iain Williams in Caracas, Venezuela.
By Steve Goldstein, MarketWatch
LONDON (MarketWatch) -- The British pound weakened on Monday after the U.K. government's landmark move to nationalize mortgage lender Northern Rock.
The government on Sunday nationalized the U.K. lender, arguing that offers from Virgin Group and the Newcastle lender's own management wouldn't have given enough value to taxpayers. The Bank of England has already provided billions of pounds in emergency loans to Northern Rock, a U.K. lender that needed emergency assistance last year when credit markets dried up. See related Northern Rock story.
The pound slumped to $1.9481 from $1.9613, and neared a fresh record low against the euro.
"It's the least desirable outcome for the banking sector, it suggests the market can't find a market solution for this," said Rob Carnell, an economist for ING in London.
"It also throws a doubt of credibility into the government's ability to manage the economy."
During a press conference, British Prime Minister Gordon Brown denied that London had suffered any damage to its stature as a financial center. Brown pointed out that problems with Northern Rock started with difficulties in the U.S. subprime mortgage market, and noted difficulties with U.S. bond insurers, the rogue-trading scandal at French bank Societe Generale and the bailouts needed at two state-backed German banks.
ING's Carnell said Brown's argument is a bit thin.
"British banks have been reliant on wholesale markets for funding, you can't simply blame the U.S. because the problems initially came from there," he said. "It does look like (U.K. banks) are going to be quite exposed."
Separately, the euro also was weak against rivals -- down to $1.4621 from $1.4680 -- as Bank of France Governor Christian Noyer said over the weekend that the European Union "is not immune from any weakness in the U.S. economy. Growth may be weaker than we hoped, but I don't see a big setback."
ING's Carnell said the U.S. has been actively trying to take steps to improve the economy, through interest-rate cuts and fiscal stimulus, while the euro-zone has been "largely in denial."
The European Central Bank has kept interest rates at 4% throughout the turmoil in credit markets.
"It wouldn't surprise us for the dollar to make some headway," he said.
Activity otherwise was light with the Presidents Day holiday in the U.S.
Markets will be looking ahead to release of the minutes from the last Federal Reserve interest-rate setting committee meeting, due out Wednesday, as well as housing starts figures out that day.
"The minutes of the FOMC meeting held at the end of January should garner some attention, since they will reveal more details on the U.S. Federal Reserve's risk assessment at that stage and will probably show downward revisions to growth estimates," said Martin McMahon, an analyst at Credit Suisse.
Goldstein is MarketWatch's London bureau chief.
Expat Village is edited and published by
Iain Williams in Caracas, Venezuela.
