As the election campaign gets formally underway, no one yet has much idea what government the country will wake up to on 8 May. A Labour-Scottish National Party (SNP) pact. A Miliband-Clegg coalition. A Tory-Ukip government, with a beaming Nigel Farage taking over as Minister for Europe. There are almost as many possible combinations as there are shots of rugged coastline in an episode of Poldark.
Sure, it is still possible there will be a clear majority for either the Labour or Conservative parties. A first-past-the-post electoral system is designed to produce stable governments, and it is certainly possible that one party may come out ahead with only 33% or 34% of the national vote. After all, Tony Blair managed precisely that in 2005, winning a thumping majority with 35% of the ballots cast.
Another hung parliament
But right now, it looks unlikely. The collapse of the Labour Party in Scotland, and the problems the Conservative Party has reaching out of its south-eastern strongholds means another hung parliament is an odds-on possibility.
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The bookies certainly think so, and they are more often right than wrong. At Paddy Power, for example, a hung parliament is 1/6 on, whereas a Tory majority is 6/1 against, and Labour 9/1. In other words, it is by far the most likely outcome.
Last time around, markets took a hung parliament in their stride. But that was largely because a stable five-year coalition between the Tories and the Liberal Democrats was agreed very quickly.This time around, it may not be so easy.
A second hung parliament, followed by a minority government even worse, one dependent on the support of lots of minor parties, all demanding some special favour for their own voters and the UK will start to have the whiff of a banana republic about it. Even worse, there may well be the threat of the government falling at any moment, and another election being called at short notice.
Britain risks losing its shine
That matters. It is a long time since sterling was the global reserve currency, but among investors it is still viewed as a solid holding. A decent share of global central-bank reserves is still in sterling the pound has grown from accounting for 2.5% to 4% of global reserves in the last few years, making it the world's third-largest reserve currency after the dollar and the euro.
The UK attracts a huge share of inward investment. We rank 11th in the world as a destination for foreign direct investment, according to UN figures, with £37bn coming into the country last year. And gilts are still hugely popular on the global markets.
According to the government's Office of Debt Management, 30% of UK government bonds are sold abroad. Since the deficit last year amounted to about £90bn, that means around £30bn was funded by foreign investors.
As it happens, we need the money and badly. Although it does not get much coverage any more, the UK runs a huge and growing trade deficit. Even if the UK is the oldest industrial nation in the world, financially it looks increasingly like an emerging market, reliant on foreign capital to fund itself. The trade deficit hit £34bn last year, equivalent to more than 5% of GDP, and the highest level seen since the booming late 1980s.
A toxic choice of governments
That is fine so long as the world likes sterling we are essentially just swapping lots of government IOUs for stuff made abroad. True,that might store up trouble in the long run, but day-to-day it works out fine. In the past, global investors have been perfectly happy to take those IOUs.
The UK is a stable democracy, with a long tradition of the rule of law, and an economy that, while it racked up lots of debts, also grew at a reasonable rate, and created plenty of jobs.
But political instability could change that mix dramatically and for the worse. None of the likely alternatives are very appealing. A Labour-SNP deal? That would mean a lot of extra spending, and the potential break-up of the country. The Tories and Ukip? That would mean an early referendum on EU membership. Labour and the Greens? That would mean lots of anti-growth legislation.
A minority Labour or Tory government? That would mean the administration could fall at any time, triggering a fresh election and it would make taking tough decisions difficult. It doesn't make much difference how you swap around the combinations. None is going to produce a government that looks like it has a solid five-year grip on power or can plan beyond the end of next week.
So it's still anyone's guess what will happen on 8 May (although at the MoneyWeek offices, Merryn and John are currently working on a very special project to make sure readers know what to do as soon as the results are in they'll be telling you more about it soon).
But a wobble for sterling on the currency markets might well be on the cards and that could be followed by a longer-term reassessment of whether the UK counts as a safe haven for anyone. If you haven't already moved a chunk of your portfolio into other global markets, it might be wise to do so before the votes are in.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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