The Reward for Pulling Up Socks

Following sterling's devaluation in November, the International Monetary Fund arranged a $1.4 billion line of credit for Britain--with the proviso that the money could be used only if Prime Minister Harold Wilson's government took drastic measures to cure the country's chronic balance of payments problem. When Britain was allowed to go ahead and tap that credit last month, it meant that the IMF was reasonably satisfied with the way in which Britain has pulled up its socks, economically speaking. Last week London received still another vote of confidence from international moneymen: central bankers from twelve industrial nations-agreed in Basel, Switzerland, to provide Britain with $2 billion in new standby credits for defending the pound.

Such confidence seemed deserved. After nothing but disappointing news for months, Britain's latest trade figures show that devaluation and Wilson's austerity measures--a bare-bones national budget, tight wage controls and heavy new taxes--have finally started to work. During June, the government announced last week, the country's exports continued their slow but steady increase. More encouraging, imports showed their biggest monthly decline since devaluation, indicating that consumer spending, which had been fueled by fear of higher prices, has finally started to ease. As a result, the country's trade deficit for June, while still a substantial $280 million, was down by 34% from May.

Promise of Compensation. Britain's hopes for an economic turnaround were further buoyed by its new financing arrangements. Purpose of the ten-year credit package was to stanch flight from the pound by countries in the so-called "sterling area," which consists of all British dependencies and Commonwealth members (except Canada), plus such other countries as Kuwait, Jordan, Libya and Ireland. Because they hold the bulk of their reserves in pounds, most sterling-area members suffered automatic losses when the pound was devalued--and a number of them have lately been selling off large amounts of sterling out of fear that Britain might be forced to devalue again.

A major effect of that selling was a sharp decline in the price of sterling on foreign exchange markets. Obliged to buy up pounds to keep the currency from dropping too far below its $2.40 official price, Britain has seen its reserves of gold and foreign currencies shrink to $2.7 billion, less than half the amount that would be necessary to re deem all the pounds held by individuals and central banks in sterling-area countries.

Although final agreement on Britain's new credit package will not be reached until September, the basics are clear. The $2 billion would be used only to finance sales of pounds by those sterling-area countries that are experiencing balance of payments deficits of their own, thus eliminating the need for Britain to continue dipping into its own reserves. Those countries free of deficits, meanwhile, will be asked to hold onto their sterling. In return, Britain will promise to compensate them for all losses incurred in the event of another devaluation of the pound.

Confident that the latest arrangement will be a success, Bank of England Governor Leslie O'Brien said after the Basel meeting: "I don't see any possibility of another devaluation." Similar faith was reflected on the foreign exchange markets, where the pound's price climbed last week from a post-devaluation low of $2.3829 to $2.3908.

Below $40. Britain was not the only troubled country to come away from Basel with cause for optimism. Another was France, whose reserves of gold and dollars have so far dropped from $6.8 billion to $5 billion in its crisis. To help France battle speculative attacks against the franc, the Bank for International Settle ments and central banks of five countries (the U.S., Belgium, The Netherlands, Italy and West Germany) agreed to provide Paris with short-term credits totaling $1.3 billion. At the same time, the Basel conferees sought to dampen gold speculation by devising a scheme by which South Africa is expected to resume its sales on the world's bullion markets. In view of all this, the price of gold on the London market last week went down to $39.10 per oz.--the first time it has dropped to under $40 in nearly two months.

* Austria, Belgium, Canada, Denmark, The Netherlands, Italy, Japan, Norway, Sweden, Switzerland, West Germany and the U.S. Another participant in the negotiations was France, which opted out of the credit scheme because of its own financial difficulties.

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