Britain's credit 'more risk than McDonald's'

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The pound weakened against the euro, which was up a third of a penny to 87.43p, amid growing fears sterling could reach parity against the single currency and the US dollar. The pound was up 0.4 cents against the greenback to $1.484 today.

It came after the National Institute of Economic and Social Research said the UK economy contracted 1% between September and November and warned "there was every reason to believe" it would be worse still in the final three months of the year.

The grim predictions by the leading think-tank cast fresh doubt over Alistair Darling's hopes that growth will resume in the second half of next year. The Chancellor's forecasts made in the Pre-Budget Report just two weeks ago already look hopelessly optimistic.

If the NIESR is right, official fourth-quarter data released next month will show decline of more than 1%, putting the start of this recession on a par with that of the early 1990s as High Street sales and factory output slump.

The NIESR said: "The Government faces the real risk that output will fall more sharply than it expected to the end of next year. The main problem it needs to address very urgently is the availability of bank credit." The Bank of England has slashed interest rates from 5% to 2% in the past three months in the battle to stave off a deep recession. The Government has also provided billions of pounds of funding to the UK's banking sector to boost lending to homebuyers and small businesses.

It is being paid for by hundreds of billions of pounds of extra Government borrowing which has resulted in Britain having a worse credit rating than McDonald's and other large companies. Investing in Government debt is now almost twice as risky as buying McDonald's corporate bonds, according to the market in credit default swaps, a form of insurance for buyers of such debt.

Professor Stephen Haseler, director of the Global Policy Institute at London Metropolitan University, said the pound could soon be worth $1 as an "unfortunate consequence" of Government plans to spend its way out of recession. "Britain is already in a full-scale sterling crisis," he said.