Financial impact of Blair woes probably short-lived

The pound has fallen on uncertainty about Tony Blair's remaining tenure as British prime minister but any longer-term impact on UK assets should be short-lived if finance minister Gordon Brown replaces him.

Confident in an independent central bank, investors are unlikely to sell British assets extensively unless there is a long leadership battle which suggests Brown, the hot favorite, won't win, casting doubt on the future direction of policy.

We've known Blair was on his way out. The economic picture is not going to change, especially with Brown in charge, one City stock dealer said on Thursday.

Having led the Labor party to three successive election victories, Blair has long said he will not fight another election and will give a successor ample time to bed in before an election expected in 2009.

But pressure from within the party , peaking with the resignation of a junior minister and seven government aides, has fired up debate about whether Blair goes in about a year, when he wants, or much earlier.

Market reaction has mainly been on the foreign exchanges, where sterling has weakened as the political crisis has built. The FTSE-100 has fallen, but on other factors, notably concerns about U.S. interest rates. Gilts have been unmoved by it all.

Analysts reckon Blair's troubles could keep hurting sterling over the next few days. You would expect a degree of political uncertainty weighing on sterling, said David Page, an economist at Investec.

But otherwise, if a Brown succession looked assured, ensuring continuity of economic policy as the 55-year-old Scot has been Blair's finance minister since 1997, markets are likely to take it all in their stride.

In terms of evaluation of the equity market and the bond market, I don't thing there will be any significant impact, said Chris Iggo, senior strategist at AXA Investment Managers.

CONTEST

The potential cloud is if the Blair-to-Brown transition gets derailed.

Markets are fairly happy with the idea that Blair will hand over to Brown but may start to get nervous if this scenario is questioned, said Jonathan Loynes, chief UK economist at Capital Economics.

So far other credible candidates have not openly declared their hand but some Labor members insist there must be a leadership election to decide the future direction of the party.

But even then, with monetary policy now in the hands of an independent Bank of England, Labor's masterstroke when it came to power in 1997, the days of savage market reaction to political change seems a lifetime away.

Giorgio Radaelli, chief strategist at Switzerland-based wealth manager BSI, said it was a distant memory when British political turmoil disrupted investment.

It is not a factor which concerns us at all because I don't thing there would be a significant enough change in policy to change the outlook for UK equities, he said.

Even when, in not dissimilar circumstances, Margaret Thatcher gave way to John Major in 1990, markets generally kept their poise.