Column-Sterling needs the kindness of reserve managers :Mike Dolan By

By Mike Dolan

LONDON (Reuters) – Perhaps remarkably, some of the world’s major economies still hold at least part of their rainy-day savings in sterling and British government bonds – raising questions about whether long instability in both will keep them doing so.

A pound plummeting to record lows and an illiquid and sometimes unstable gilt market has sent shockwaves around global markets since late last week – adding credence to recent fears that Britain, still the world’s 6th biggest economy in the world, risked a balance of payments crisis on current policy trajectories.

The decision by new Prime Minister Liz Truss to go for broke and slash taxes during raging inflation, an energy shock, mounting borrowing needs and rising interest rates has perplexed the sort of foreign investors Britain sorely needs to attract to keep balancing its books. Sterling and gilts have taken the immediate heat and no one’s clear yet what happens next.

And yet despite many jibes about Britain being seen as an emerging market, it has retained an enviable position as printer of one of the world’s five main reserve currencies – second only to the United States and euro zone, roughly on par with Japan and ahead of China.

At the International Monetary Fund’s last count in the first quarter of this year, almost 5% of the world’s foreign currency reserves were denominated in sterling – a total of $625 billion dollars worth of sterling and sterling assets on a crude calculation from the $12.55 trillion total.

In context, that’s more than two thirds of the Bank of England’s own bloated balance sheet – which was amassed since the 2008 banking crash and doubled up during the COVID-19 pandemic.

In other words, that stable foreign demand for sterling assets is a powerful buffer against the sort of “sudden stop” creditor strikes many developing economies experience and one reasons many analysts think calm can return.

As ING economist Chris Turner points out: “UK authorities will probably just have to let sterling find its right level. The UK has a reserve currency so it can always issue debt – it’s just a question of the right price.”

But what if that reserve currency position is threatened and foreign central banks balk at holding so much sterling in their national savings stashes?

GRAPHICS: Sterling in world FX Reserves: https://fingfx.thomsonreuters.com/gfx/mkt/byvrjzjarve/One.PNG

GRAPHICS: Trade-weighted pound, gilts and volatility: https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrormlpm/Three.PNG

ASIA EXIT?

As the pound nosedived by an eye-watering 5% to record lows against the dollar in a matter of minutes in Asian trading hours on Monday – before London trading had even started – there was some suspicion of major investors there bailing out of British holdings.

Seven of the world’s top 10 reserve holding…