On 16th of September 1992 a collapse in the pound sterling forced Britain to withdraw from the European exchange rate mechanism , the ERM. This day has since become known as Black Wednesday
The ERM was introduced by the EU to stabilise European currencies in preparation for the introduction of the euro. Countries intending to replace their currency with the euro were required to keep their currency within a certain range for a number of years
Member nations with strong currencies were supposed to sell them and also purchase weak occurrences in order to help maintain suitable exchange rates
Initially the UK did not join the ERM but finally did so arguably at too high a value. After two years with the pound appreciating, the British government took steps including raising interest rates and authorising the use of foreign currency reserves to purchase pounds
One factor was that the German central bank refused to purchase the pound and did not sell many Deutschmarks
The Bank of England raised Interest rates from 10% to 12% and then later to 15% in the space of one day.
This move was ineffective and those who were sceptical about the ability of the government to stabilise the pound continued to sell the currency
Hedge fund manager George Soros bet against the pound believing that UK would not have sufficient reserves to prop up the pound
He borrowed UK gilts and sold them before buying them back at low prices repeating this process every couple of minutes, making a profit each time
The day before Black Wednesday , the Soros fund began selling large amounts of pounds causing the price to plummet.
The Bank of England spent an estimated 40% of its foreign exchange reserves in a futile effort to prop up the pound
On the evening of 16 September Chancellor Norman Lamont announced that the UK was suspending its membership of the ERM
George Soros is accused of breaking the Bank of England and apparently made £1 billion of profit from the trades
Aftermath:
The value of the pound plummeted following exit, interest rates dropped and inflation subsided. All this helped to support the nation’s economic recovery by making its goods and services cheaper for buyers using foreign currencies
The reputation of the Conservative government for financial management sustained a massive blow as a result of the ERM debacle from which it did not recover for many years
Ironically the Labour opposition supported membership of the ERM but its reputation was not affected by this as they were not in government at the time.
Tony Blair won a landslide majority in 1997
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