Public finance woe batters pound again

Sterling crashed below $1.38 and 1.07 as investors took an increasingly gloomy view of the economy and the increasing likelihood that the Government could lose its AAA credit rating.

At the heart of today's public finances figures for December was the near-nationalisation of Royal Bank of Scotland, which added about £20 billion to the nation's debt burden. A further £2 billion was spent shoring up building society Bradford & Bingley and re-financing the financial services compensation scheme loans.

But even without the banks laying waste to the Government's coffers, the picture looked grim, with a £20 billion deficit. "Public finances are deteriorating sharply. It's another dire day for the UK economy," said Howard Archer of Global Insight.

Borrowing for the financial year so far has reached just over £70 billion — more than double its position this time a year ago and the worst since records began in 1946. But the situation will get even worse as Gordon Brown's attempts to refloat the economy through extra spending and tax cuts takes its toll.

With the growing likelihood that RBS and Llloyds will now have to be completely nationalised, the government will plunge even deeper into debt. Investors are increasingly concerned that credit rating agencies will downgrade Britain's sovereign debt.

The pound's slide today was worsened by comments last night from Bank of England Governor Mervyn King that he was not opposed to the current weakness of the pound. He is poised to start printing money in a bid to free up the money supply.

Fourth-quarter gross domestic product data on Friday are expected to confirm that Britain is in recession, while the Bank of England is likely to cut interest rates by a half a percentage point on 5 February.

Currency analysts at the Bank of Tokyo-Mitsubishi UFJ said: "The pound may fall to $1.30 sooner rather than later."

Today it was down1.52 cents at $1.3758. The euro was up 1.35p at 93.85p. That means a pound buys just 1.0673.