Predictions from the industry that confidence in UK stability would falter on fears of a hung parliament would hamstring the UK were realised overnight.
Sterling fell dramatically against the dollar to new one-year lows last night on exit polls suggesting that the Conservatives would gain seats but fall short of an outright majority.
By this morning, as a hung parliament became certainty, the pound fell further to $1.4717 against the dollar.
The FTSE 100 also fell 1.7 per cent early this morning.
Michael Bolton, European sales director at Clayton Euro Risk said: “This is a disaster for Britain. Our public debt is enormous and markets are going to panic that a hung parliament won’t be able to deliver any decisive action at all, let alone fast enough. I’m deadly serious when I say, think Greece.”
But Ray Boulger, senior technical director at John Charcol, says markets had already priced the threat of a hung parliament into gilt prices and that he doesn’t expect to see much movement today.
Robert Sinclair, director of the Association of Mortgage Intermediaries said: “Markets will certainly react and particularly if they consider the Tory minority as a threat to decisive decisions, but I think the reaction will be to price debt higher.
“The immediate concern that poses for the mortgage industry is that mortgage rates will correspondingly have to go up.”
Research from Easyroomate.co.uk says that if gilt rates went up by just three-quarters of a per cent, and mortgage rates rose accordingly, higher mortgage rates would cost families an extra £624 next year on a new £118,000 mortgage – the average according to CML figures – or £52-a-month on a repayment mortgage. This is the equivalent of raising income tax by three points to 23% for someone earning the UK average wage of £25,800.
Jonathan Moore, director of easyroommate.co.uk, said: “A rise of three quarters of a per cent in gilt yields is a conservative estimate of the impact of the hung parliament.”
Michael Bolton, European sales director at Clayton Euro Risk, said bond yields would go “crazy” because international investors in the UK would lose confidence.
He believes there is a market consensus that it is highly likely that the UK will have to call in the IMF to ratify any economic plans the Conservatives, or coalition, comes up with.
Bolton said: “The IMF will now want to be involved definitely. The plain fact is that there is now a 90% probability that the UK will have its credit rating cut from AAA to AA. Britain is in a very precarious place and the price of debt will reflect that.”
Alan Cleary, managing director of Exact, said the UK’s sovereign debt would come under pressure and our credit rating, “would certainly be a question”.
And Simon James, founding partner, Gore Browne Investment Management, said: “Uncertainty is bad for markets, and therefore bad for gilts and sterling. The more difficult it is to form a viable government, the more difficult it will be to return the UK to fiscal discipline.
“Gordon Brown has presided over some of the greatest fiscal profligacy known to the current UK electorate, but for years the Tories have consistently failed to make this point.
“It is shocking that we got to election day with voters still believing that Brown was the man to trust with the economy. But Osborne does not look up to the job either.”
The politics
The future is still uncertain this morning as several constituencies are still left to announce, but the Tories are out of the running for an outright majority.
Early indications suggest the Tories intend to run with a minority government and Liberal Democrat leader Nick Clegg has come out this morning saying the party with the largest number of votes should seek to form a government.
Despite this, Labour leader Gordon Brown still appears to believe he’s in with a chance to rule.
Alan Cleary, managing director of Exact mortgages, said: “I think it’s incredible that even though the Tories have won the majority of seats, Gordon Brown is still desperately hanging onto power.
“The Tories will run with a minority government, and I think it’s important that we have another more decisive election in the short term.”
Ray Boulger, senior technical director at John Charcol, agrees with Cleary.
“Everyone will be wondering whether Cameron will form a coalition, but I suspect he will rule with a minority government,” he said.
“Teaming up with the Liberal Democrats would mean the Tories having to concede too much – the danger with that is that no coalition creates uncertainty, which impacts negatively on markets. This will only be remedied by strong action.”
Nigel Payne, managing director at Assurant points out that whatever the Tories decide to do, they need to do it quickly. “The outlook totally depends on who does what. Who’s in the coalition and who isn’t.”
Simon James, founding partner, Gore Browne Investment Management says a further election, perhaps in the autumn, seems probable. He added: “This will allow continuing uncertainty. The parties will have to reconstruct their teams and their messages.”
Paul Hunt, managing director of Phoebus Software, says a hung parliament doesn’t have to mean “the end of life as we know it”.
He added: “Greece has a strong majority government but that hasn’t been able to prevent a financial meltdown.”
Some in the industry were more positive on the outlook for Britain.
Mark Blackwell, managing director of xit2, said: “Ten of the 16 countries worldwide that have a triple-A financial rating are run by coalition governments. This proves hung parliaments don’t kill off economies.
“Culturally we have not been a nation built on coalitions in peace time so the markets may wobble in the short-term.
“But as long as the two parties can put their differences aside, focus on what is best for the electorate and maintain financial stability we shouldn’t see long term detriment to the markets.”
