The day that Britain got mugged

TEN YEARS AGO next week, Britain's economy suffered its most tumultuous day in living memory. September 16 1992 became known as Black Wednesday - or White Wednesday among hardcore eurosceptics - when the pound was savagely ejected from Europe's Exchange Rate Mechanism (ERM).

That day left the economic policy of John Major's Conservative Government in tatters, as the impotence of central banks in the face of massive market flows was brutally exposed. No amount of intervention could prevent the pound being mugged by speculators, most famously by billionaire financier George Soros. By the end of the day, Bank of England reserves had been depleted by $27bn (£17.4bn). For the foreign exchange markets, it was like taking billions of pounds of candy from a baby.

It was also the day when, in the middle of a housing crash, interest rates were raised twice to defend the pound, to the suicidal level of 15%, although that last desperate throw of the dice was never implemented.

The ripples from that day are still lapping now. The Government, fresh from a dramatic General Election win, never recovered its authority and was ejected from power in humiliating circumstances nearly five years later.

In the past decade, support for the Tories has not returned to the levels they enjoyed before Black Wednesday and never exceeded Labour's poll ratings for more than a day or two. The disaster of that day also undoubtedly fed the British public's innate suspicion of the euro and fears of once again locking our currency into a fixed system. The scars from that day of economic ignominy will be with us for many years to come.

Relive the day with leading City figures and politicians who were in the front line of an extraordinary chain of events.

The Chancellor

NORMAN LAMONT, Chancellor of the Exchequer, 1990-1993, now a peer and director of commodities trading house Balli:

'The other day I had dinner with Mario Draghi, who was head of the Italian Treasury at the time - he now works for Goldman Sachs - and I asked him whether anyone in Italy remembered the day on which Italy left the ERM.

'He said absolutely nobody remembered it and the idea that there should be programmes and newspaper articles a decade on, I think, tells one something about the differences between this country and Europe. But of course it is not just Italy, you could also say the same about France, Norway, Sweden, Finland, Ireland, Portugal, because in every one of those countries they lost virtually all their foreign exchange reserves. They either devalued or floated.

'But I think in Britain we just tend to see things from a rather parochial viewpoint. When people talk about Britain being exited from the ERM, the reality is after the summer of 1993, as the crisis went on, the ERM virtually ceased to exist because we moved then to a system of broadband that was virtually floating.

'What is mistaken is the way we see this as a British phenomenon as if the entire world just circled around Britain. This was a problem right across the whole of Europe and it was a crisis for every country in Europe. The problem didn't stem from anything that was done by the British Government. It stemmed from the inherent tensions in the system, which was the position of Germany post-reunification enjoying a boom while Britain was in recession. Britain needed lower interest-rates, Germany needed high rates.

'I'm slightly surprised there is so much interest in it and I think people perhaps ought to see it in its real perspective 10 years on - maybe they can't. I don't think the whole experience was bad for Britain. The ERM did enable us to get inflation down extremely markedly. Then when the ERM had done its task, the thing disintegrated and I was able to set a new framework for monetary policy which has lasted to this day. I think the drama of the day didn't really matter.

'One of the things that tabloid newspapers tend to talk about is the loss of reserves. But reserves are not something you can spend on hospitals or schools and in any case when you spend reserves you don't lose them, you swap them for another currency. So I think in many ways the drama of Black Wednesday, looking back on it, was a bit of a non-event. What was not a non-event, though, was the recession.'

The Prime Minister

JOHN MAJOR, Prime Minister 1990-1997, now acts as adviser and director for a number of companies:

'Throughout the morning, messages kept coming up from my private office saying the turmoil on the foreign exchange markets was continuing and the pound was still in difficulties. So it was evident we had a very difficult day on our hands...(later in the day) Norman Lamont came in and he was pretty white-faced and edgy as well he might have been and he said 'It hasn't worked', by which he meant the intervention and the 2% interest rate rise hadn't worked and they were still selling.

'It was very clear, therefore, we had to take further action. The question was - what should it be?...That evening, late at night, when I went back to my flat in Admiralty (Number 10 was being refurbished) to think about the events of the day, I sat there for some time considering what the future might be and I wasn't at all certain that I could or even should remain as Prime Minister. The case for me to resign was fairly straightforward. I had been Chancellor when we entered the ERM, I had been Prime Minister when were ejected from the ERM and it was a political disaster.

'Was I, therefore, in a position to resurrect European and economic policy or could it be better done by someone else? For several weeks thereafter, I still wondered whether it was the right thing to do - to stay or to go - and I was persuaded to stay, but I shall probably wonder to the end of my days whether it was the right decision.'

Extracts taken from The Major Years, courtesy of Blakeway Productions

The Government adviser

DAVID CAMERON, special adviser to Norman Lamont 1992-1993, now Conservative MP for Witney:

'It was plainly a dreadful day and obviously a failure. The most important thing is to learn the lessons and make sure it cannot happen again. Germany was in a boom and needed high interest rates and the UK was in a recession and needed low interest rates.

'In effect, the high German rates were imposed on the whole of Europe. It's interesting that most of the people most closely involved hold rather passionate views about the economic lessons to be learned from the ERM.

'I was a special adviser to Norman Lamont, William Hague was his PPS (Parliamentary Private Secretary) and Michael Portillo was Chief Secretary to the Treasury. We did everything we could to make it work but we couldn't.

'The biggest myth about the ERM is that if only we had realigned the currency then all would have been OK. That is absolute tosh. The Italians and Spanish realigned and they had to come out as well. When we were in the ERM, we couldn't cut our interest rates below the German level - however much we cut our exchange rates within the ERM it would not have made any difference. We needed a cut in rates and we just could not do it within the ERM.'

The City economist

JULIAN JESSOP, international economist Midland Bank 1992-1996, now European chief economist, Standard Chartered Bank:

'I had joined the Midland having just left the Treasury, so I had seen us go into the ERM and then I saw us go out. The thing I remember more than anything else is going over to futures traders to tell them interest rates had gone up to 15% and they just laughed.

'The idea that 15% rates would help anything was just comical. The policy was already dead by then. It was obvious the market would just blow away any policy response the Government came up with. At this stage the politicians were a sideshow, the markets were running everything. There was a real sense of inevitability. Everyone was just dusting down their models to see how low sterling could go.

'Lamont was seen as desperate but there was also sympathy for him because it was not his policy. I was an international economist at Midland and it was my first experience of how strong the markets are. I learned about how the markets were all about animal spirits and flows. In a way, the Wednesday itself was the calm before the storm because it was before sterling floated and people pretty much left the office on time.'

The academic

PROFESSOR Tim Congdon, founder and chief economist Lombard Street Research since 1989:

'The day itself was very odd. Anyone who knew anything knew we were not going to be able to stay at 15%. I remember clearly thinking the 15% base rate that was around at the end of the day was daft, obviously nuts, and couldn't last. In fact, that 15% base rate does not even appear in National Statistics. It was the era of negative equity and there had been a very large increase in the number of personal bankruptcies of a kind we had never had before. With 15% rates, it would have been even more profound. It was unimaginable and clearly unsustainable.

'The two things about the day I will always remember: one was Norman Fowler, who was chairman of the Conservative Party, denying there was a crisis. That was absurd. The other was Peter Jay's (then BBC economics editor) comment that night. He was very dismissive of the Government.

'The episode led to massive criticism of the Treasury and there is a sense in which it destroyed the reputation of the Treasury in setting macroeconomic policy. One of the other longer-term consequences is that it may prove the end of the Conservative Party. In the opinion polls, they lost 10 or 15 points and never got it back. They lost those people who borrowed to buy houses in the Eighties, middle-class people who the Conservatives have not recovered and possibly never will.'

The industrialist

SIR MICHAEL ANGUS, President of the CBI 1992-1994, now retired:

'That day we had a meeting of the CBI council in London. We were going through a normal agenda and in the middle of it I got a message that interest rates had gone up to 15%. I announced this to the 100 or so people there, who were quite stunned. It was clear the situation was a dramatic move that could not last.

'We were waiting for the other shoe to drop. No-one could believe we would go on being at 15% - another major change would have to come about and it did when we exited the ERM. I don't think anyone took it more seriously than that. It was clearly a political response to a crisis that could not last.

'There had been an error in entering the ERM and this was rather an undignified way of leaving it. To some extent it did make people lose confidence in the idea of a euro.'

The foreign exchange dealer

MARK AUSTIN, foreign exchange trader at HSBC in 1992, now Chief Currency Strategist HSBC:

'The history of Black Wednesday is that it's all about George Soros and the speculators breaking the Bank of England. In fact, what happened was that lots of corporates had been hedging, in case sterling fell suddenly against the Deutschmark, so there had been lots of defensive selling of sterling by companies with exposure to Europe.

'The official line had been it was all down to wicked speculators whereas, really, the banks had acted almost entirely as intermediaries. It was risk against reward. The advice we were giving clients was that probably nothing would happen, but if it did then it would be horrible for you. On the day, the selling pressure intensified and the Bank of England was just sitting there at the intervention rate until the close of trading.

'What really scared people were the 200 and 500 basis-point increases in interest rates. It was seen as an unsustainable policy response. It was a controlled panic, we had to try and execute for customers but the flows were very large.

'The markets were very nervous and the price jumped around. It started as a trickle, became a steady flow and then a complete avalanche of selling. I remember standing on a forex desk talking to one of the senior dealers in Singapore, trying to explain what had happened and him saying 'This can't be right'. The amount of money that can flow swamps anything a central government has in reserve. It was unprecedented in the sense that a country had never done a realignment other than at the weekend, behind closed doors, in Frankfurt.

'One of the surprises was that the political fallout for the Prime Minister and the Chancellor took a long time to come. I expected the immediate resignation of the Chancellor and it didn't come. It also looked as if John Major's political future was one of immediate demise but it turned out to be a long, lingering execution.'