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When currency rates approach round numbers, resistance is often seen. Not, it seems, in the case of sterling against the euro. The pound has fallen 18% this month, rushing to 98p without putting up a fight. Parity now appears inevitable.
The moment that sentiment moved decisively can be identified: it was the comment by the German finance minister, Peer Steinbrück, that the UK was pursuing "crass Keynesianism", indicating that Germany was not prepared to fund similar stimulus packages among eurozone neighbours.
We will discover in time whether Germany is really able to resist being dragged down that path. But, in the short term at least, the remarks clarified matters. The euro represented financial prudence; sterling was the currency of indiscipline. For investors seeking safety at the end of a hard year, dumping sterling was a good bet.
It is not as if the UK authorities appear concerned. Back in the mid-1980s, when sterling neared parity against the dollar, the prospect was regarded as so unwelcome that the Treasury raised interest rates several times. That will not happen now. A rate cut is almost certain next week.
It is interesting to speculate how low sterling would have to fall for the Bank of England to be dissuaded from cutting. Would it be £1.10 to the euro? Who knows? But parity seems to hold few fears in Threadneedle Street. The inflation imported via a weak pound is simply outweighed by the greater deflationary forces at work, such as the prospect of 600,000 job losses in 2009.
While the Bank can be relatively relaxed about a weak pound, the Treasury cannot be sanguine. It must raise £118bn next year but the figure is predicated on a 1% fall in GDP; the real number may turn out to be £150bn-plus. At some point, overseas investors might demand compensation for buying assets denominated in a depreciating currency.
Long-term gilt yields, it should be said, are not hinting that this nightmare is close to being realised, though recent gilt auctions cannot be described as enthusiastic. That plot will play out once the big auctions begin in earnest.
It is still possible to believe that sterling will not fall far beyond parity. Markets are applauding German budgetary discipline, but will they be so enthusiastic if it leads to deep recession in the eurozone? Bank of America's economists expect a contraction of 2.5% in the German economy in 2009 - roughly where Britain is likely to be. In the end, eurozone interest rates are also likely to fall close to zero.
That won't make the outlook for the British economy any less grim. But, relatively speaking, which is what matters in the foreign exchange game, sterling should start to look a little less ugly against the euro in 2009.
No time for heroics
Debenhams has sung a happy tune for months about how its £1bn of debt could be managed via "deleveraging initiatives", in the gruesome phrase of the chief executive, Rob Templeman.
The claim always looked heroic, and especially so after Templeman spelled out what he meant in October. The dividend was chopped to save £28m, capital expenditure was cut by £40m and the company announced a squeeze on costs and working capital. Even in aggregate, these measures were never likely to make much dent in £1bn.
Now it looks as though Templeman and his fellow directors are close to accepting as much. No decision has been made, but January's board meeting will consider raising equity. The answer should be "yes". About 42% of last year's operating profits of £176m were consumed in interest payments, a dangerous proportion.
True, Debenhams is not thought to be close to breaching its banking covenants but the lesson from other industries is that waiting until the hounds are at the door is not a sensible way to raise capital. Ask Taylor Wimpey.
Debenhams might need £500m to make its capital ratios robust. At a firm worth £220m, that's some fundraising. But the answer lies with the private equity houses TPG and CVC, which still own 22% of the firm (the other member of the 2003 buyout team, Merrill Lynch, sold its remaining shares in March).
Without TPG and CVC, Debenhams is in a tricky spot. The private equity crew are still seen as having the inside track at Debenhams. Templeman was their appointment and they have consistently supported him. Now is the moment to show that these words mean something by underwriting a fundraising.
Indeed, since TPG and CVC helped to push Debenhams into its mess by loading the business with so much debt, offering a helping hand is almost a duty. Reputations are now on the line.
nils.pratley@guardian.co.uk
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