Dai-Ichi Securities: As the EU secures a reprieve for the euro, will markets now look more closely at Britain’s slow response to a hung parliament.

Dai-Ichi Securities says that the stay of execution represented by the EU’s €750 billion defense package for the euro may see attention shift away from the Greek debt crisis towards the UK’s political landscape and the uncertainty caused by the hung parliament.

Indeed, markets are already factoring in the fact that the Liberal Democrats’ insistence on electoral reform is likely to scupper the chance of a coalition with the Conservative Party which considers the very notion of proportional representation to be anathema.

Markets acknowledge that a Conservative led coalition would be most likely to begin laying down measures to cut Britain’s deficit but as it is unlikely that David Cameron would be able to force such a concession through the rank and file of his party, the prospect of a Labour/LibDem coalition and the corresponding reluctance to begin spending cuts and tax hikes immediately would see sterling hammered and gilts dumped on the markets.

Dai-Ichi Securities said that with Britain’s budget deficit approaching that of Greece, the time had come for decisive action to be taken and it was imperative that the UK sent a clear message to the markets.

Dai-Ichi Securities says it is likely that sterling will be sacrificed and restated its standing advice to clients to sell sterling with conviction adding that the currency could fall to $1.40.

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