UK PM Brown's Resignation Hits the Pound

The sight of Gordon Brown resigning on the steps of Number 10 Downing Street was never meant to be bad news for the pound. Analysts said before his decision that if he were to resign this would mean a David Cameron victory, something widely seen as sterling positive.

Sharon Lorimer

Unfortunately for the pound and David Cameron, Gordon Brown's decision to offer his resignation could well mean defeat for the British Conservative Party.

The reason for this is that by offering to stand down, in the autumn mind you, Gordon Brown has allowed his ruling Labour Party to open serious talks with third party's leader Nick Clegg over forming the next government.

As the news broke at around 5 pm London time Monday night, hopes of a Conservative/Liberal coalition appeared to be dashed. Within minutes, Nick Clegg went on record saying he wanted to open official talks with Labour as well as the Conservatives.

Leading voices from within both main parties hit the TV cameras to make it clear both are open to the idea of attempting to form a so-called progressive alliance.

You could almost see the color drain out of the faces of the Conservative team negotiating with the Liberal Democrats as they rushed out an official offer on voting reform, in a bid to keep the Liberals in their camp.

It had been an amazing turn around in an election race that has left a political vacuum at the top at a time when the financial crisis has forced the UK's neighbors in the euro zone to pump billions into the system to shore up confidence in the single currency.

If Gordon Brown's plan is successful, he could stay in the top job until the autumn as temporary leader of a coalition between Labour, the Liberals and a number of nationalists from Scotland, Wales and Northern Ireland. In the autumn, Brown would step down and allow another member of his party to take over.

It must be stressed that this is simply what Brown is hoping for and Nick Clegg could still hand David Cameron a workable majority. Before Gordon Brown's resignation, the City of London appeared willing to give the coalition negotiations time, but talk of a Liberal and Labour Party coalition hit sterling overnight.

The pound is not yet significantly reacting to the coalition talks, but this may change if negotiations go on long enough, according to Steven Barrow, the head of G10 research at Standard Bank.

"The pound has been lucky that it has had the euro rescue package as cover since the election. I am though confident about the prospects for the pound," Barrow said.

The difference between the UK and, say, Greece is that Britain has more room for maneuver, he added. "The UK can devalue and print money, the UK will not default, the UK will not need the IMF," he predicted.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

His confidence that Britain will not follow Greece into trouble is shared by others.

"The three parties are sensibly committed to reduce the debt and there is zero prospect that the UK us going to default," David Blanchflower, former member of the Bank of England Monetary Policy Committee, told CNBC.

The UK economy's advantages – a relatively flexible labor market, a lower ratio of debt to gross domestic product and control over its own currency – have been cited by many analysts as reasons for not putting it in the same category as Greece, Portugal, Ireland or Spain.

"There could be some short-term volatility as the coalition talks continue but medium term we are confident about the UK's chances of avoiding major trouble like Greece; Britain's future is in its own hands," Simon Hayes, UK economist at Barclays Capital, said.

That is not something David Cameron can say at this point.