Pound Declines Versus Euro Amid Concern U.K. Slowdown to Deepen

By Agnes Lovasz

Oct. 13 (Bloomberg) -- The pound declined against the euro amid speculation the economic slowdown in Britain will worsen, necessitating more government bailouts of banks and interest-rate cuts by the Bank of England.

Royal Bank of Scotland Group Plc, the second-biggest U.K. bank before shares collapsed last week, ousted its chief executive and turned over control to the government in exchange for a 20 billion-pound ($34 billion) lifeline. Banks may cut 62,000 jobs in London by the end of next year, reducing the industry's headcount to the lowest level in more than a decade, the Centre for Economics and Business Research said.

``Developments have become so serious that the authorities have had little option but to act more aggressively,'' Paul Robinson, a currency strategist in London at Barclays Capital and a former Bank of England economist, wrote in an investor note Oct. 10. ``So far, it does not appear to have been enough.''

The pound declined to 79.37 pence per euro as of 6:48 a.m. in London, from 78.63 pence at the end of last week. The British currency traded at $1.7066, from $1.7043.

The Bank of England said today it will hold $30 billion in dollar auctions tomorrow. The U.K. central bank said it will hold one-week, one-month and three-month dollar sales and announced coordinated sales with the European Central Bank and Swiss National Bank.

Rate Bets

European leaders agreed yesterday to guarantee new bank debt and use taxpayer money to keep distressed lenders afloat, trying to stop the worst rout in Europe's stock markets in two decades and stave off a recession. The U.K.'s FTSE 100 Index plunged 21 percent last week, closing below 4,000 for the first time in five years and capping its worst week since 1987.


Barclays Plc, the U.K.'s second-biggest bank, plans to sell more than 6.5 billion pounds ($11 billion) of shares to investors and won't pay a final dividend, it said in a statement today. RBS, Britain's fourth-largest bank, plans to raise 15 billion pounds selling shares, with the U.K. subscribing for 5 billion pounds in preference shares. Chief Executive Officer Fred Goodwin will step down, the bank said.

Traders added to bets policy makers will lower borrowing costs again after cutting the main rate by half a percentage point on Oct. 8, in concert with other major central banks worldwide. The implied yield on the March short-sterling futures contract slid 80 basis points to 3.92 percent.

Government Bonds

Government two-year bonds rose last week as investors sought the shortest-maturity debt as a haven. The yield slid 51 basis points in the week to 3.53 percent. The price of the 4.75 percent security maturing June 2010 advanced 0.80, or 8 pounds per 1,000- pound ($1,714) face amount, to 101.94. The 10-year gilt yield rose 6 basis points in the five days to 4.47 percent. Yields move inversely to bond prices.

The difference in yield, or spread, between two- and 10-year gilts widened to 94 basis points on Oct. 10, the most since April 2003, indicating investors are betting on a deteriorating economic growth outlook and more interest-rate reductions.

The National Institute for Economic and Social Research also said last week Britain entered a recession in the third quarter. Gross domestic product shrank 0.2 percent in the three months through September, the first contraction for a calendar quarter since 1992, the Niesr said.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net