British Pound rises against common sense and market reality

As I wrote just about a month ago, the UK [is] on the brink of complete collapse and yet, the British Pound has been rising quite substantially against all market reality and expectations. Since I am short the GBP but the size of the position is not big enough because I didn't reject this kind of potential rebound, I am considering this as a good opportunity for shorting a bit more — which I actually did just today.

Here are some news about the UK:

May 21 (Bloomberg) -- Britain may lose its AAA credit rating for the first time as government finances deteriorate in the worst recession since World War II.

Standard & Poor’s lowered its outlook on Britain to “negative” from “stable” and said the nation faces a one in three chance of a ratings cut as debt approaches 100 percent of gross domestic product. The pound fell the most in four weeks versus the dollar before rebounding, the FTSE 100 Index slid 2.8 percent and the cost of insuring U.K. debt against default rose.

Britain needs to sell a record 220 billion pounds ($349 billion) of bonds in the fiscal year through March 2010 as the economy contracts and Chancellor of the Exchequer Alistair Darling predicts that the budget deficit will reach 175 billion pounds, or 12.4 percent of GDP. [...]

“Somebody will have to tackle the finances in the U.K., which has not been done at present,” said David Scammell, a money manager at Schroder Investment Management Ltd. in London, where he helps oversee $158 billion in assets. “The budget that we have is just unacceptable. You need a political will to deal with this enormous problem.”
[...]
Unemployment surged to 2.2 million in March, the highest since 1996, and tax income has dropped 10 percent in the past year. The IMF expects gross domestic product to contract 4.1 percent this year, the most since World War II.
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Brown needs to increase borrowing to pay for rescuing banks that have reported $121 billion in credit-related losses and writedowns since the start of 2007. The government pledged 40 billion pounds to bail out lenders and hundreds of billions of pounds in loan guarantees.
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The government gave the Bank of England authority to purchase as much as 150 billion pounds of assets with newly printed money in an attempt to lower borrowing costs.

Britain’s “balance sheet is deteriorating rapidly,” Moody’s analysts led by Arnaud Mares in London wrote in a report on April 23. “The government is taking risks with public finances.”

May 20 (Bloomberg) -- Delinquencies on some U.K. non- conforming home loans exceed those by subprime borrowers in the U.S., and losses on the securities they back are accelerating, according to independent research firm CreditSights Inc.

Almost 30 percent of non-conforming mortgages made in Britain in 2005 are 90 or more days delinquent, compared with a rate of 27 percent on U.S. subprime loans made that year, analyst David Watts wrote in a report today. Non-conforming loans are similar to subprime in that they typically have low, or no, documentation requirements and may be made to borrowers with poor credit scores.

“The similarity to the U.S. is already reflected in delinquency and repossession rates and we think it will be evident in eventual losses to investors,” London-based Watts said in an interview. “They have all of the hallmarks of the U.S. deals.”

Unemployment in Britain, which rose by 244,000 to 2.2 million in the first quarter and may reach 3.1 million by the end of next year, has coincided with “a sharp rise” in delinquencies, according to the report. Bradford & Bingley Plc, the nationalized U.K. mortgage lender, said in March provisions for bad loans soared 23-fold in 2008 and forecast “further deterioration” this year and next.

There are about 30 billion pounds ($46.5 billion) of bonds outstanding that are backed by non-conforming home loans, according to the report. The rate at which delinquencies are increasing in the securities is “alarming,” Watts wrote.
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“Losses are high and going higher,” said Watts. “The numbers are ugly, uglier than I expected.”