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Black Wednesday Essay

1175 words - 5 pages

Not everyone had a terrible experience on Black Wednesday. Some people had some insight and saw that something was happening and knew they should do something before it was too late. Some of these people were the managers of hedge funds.
Hedge funds are funds managed by professional investors, similar to mutual funds with one of the main differences being the amount that needs to be invested. Mutual funds deal with relatively small amounts of money and hedge funds require a very large initial investment. Another main difference is the way the money is handled, they use more progressive strategies, and for example things like short, long, leveraged and derivative positions in the domestic as ...view middle of the document...

If George Soros would not have had bet so much money against the pound he would not have been so known for this one event.

The Aftermath
After the events that occurred on Black Wednesday six European countries ended up removing themselves from the European Exchange Rate Mechanism (ERM). Along with Britain, Sweden, Spain, Portugal, Finland and Italy decided this was the time to abandon the ERM. While Britain was doing everything in their power to support the pound sterling their attempts were unsuccessful and a proverbial wrench was thrown into the European Exchange Market.
Initially the pound plummeted and stayed below the Deutsche Mark band, which was at 2.20 (http://www.experiencefestival.com/a/Black_Wednesday/id/1933783). With the value of the pound sterling decreasing Britain found themselves in a bad spot. Britain was now in a recession and was looking for ways to restore the economy. With Britain backing out of the ERM they were able to makes adjustments necessary which need not be based on strategies of the German Economy. With Britain now out of the ERM they were once again independently able to influence their currency. Initially Britain tried manipulating the pound by elevating the interest rates which did not help as they hoped.
In addition, other countries started to see the effects of Black Wednesday. The currencies of the five countries that left the ERM were all valued lower than the Deutsch Mark. This raised the question of how other countries will be able to endure this crisis brought on by the events of Black Wednesday. With the Spanish peseta dropping roughly 5% and the Italian lira dipped 15% Sweden made an attempt to stabilize itself by offering a 500% increase on their lending rate (Mishkin pg. 461). As always time heals everything and eventually all 6 who dropped out of the ERM were able to regain control of their currencies.
The long-term effects of Black Wednesday illustrate that the incident may have actually benefitted the British economy. With the UK able to influence the pound in ways other than the interest rate they were able to reduce the unemployment rate and expand real growth without the use of fiscal expansion. (http://www.cepr.org/PRESS/DP2073PR.htm) As for other nations affected by leaving the ERM they too were able to regain control of their currency value and in turn pull their respective...

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