NEW YORK (TheStreet) -- After the Greek debt debacle that has wreaked havoc on the eurozone, other countries with large government debt are now also being watched with concern. The U.K. is no exception and many are left wondering if the new coalition government led by Prime Minister David Cameron will be able to reign in the country's government debt.
However, comparing the United Kingdom to Greece is not exactly fair when one takes into account the fact that the U.K. has its own currency. Part of Greece's problem was that it uses the euro, but does not control it. Greece cannot use currency devaluation to ease its debt burden and without aid from other eurozone members, it would be forced to leave the euro or default on its debt. The United Kingdom, on the other hand, can choose to devalue the pound, if necessary.
The pound has lost value against the U.S. dollar since the Greek woes began, but it has gained against the euro, the currency at the center of the current debt crisis. For the moment, investors see the U.K.'s debt as a problem, but not rising to the level of Greece or other European countries.
The election results in England also sent the pound lower against the dollar, as investors question the ability of a coalition government to solve the U.K.'s problems. Lacking the number of seats needed to form a government, the Conservatives invited the smaller Liberal Democrats, who typically side with Labour, into a coalition.
The Liberal Democrats and the Conservatives have some principles in common but there is a large amount of disagreement between the two parties.
Initial progress is promising though; the coalition government has agreed to cut $9 billion out of the budget for this year. It is expected that an emergency budget will be drafted next month and will seek to tackle the budgetary and economic issues the country faces.
Despite this positive first step, the pound has still declined to new 12-month lows against the U.S. dollar. The losses suggest that there is little confidence in the marriage between the Conservative and the Liberal Democrats.
Fears over the eurozone economy and the new British government have also weighed on British equities. In the past month,
iShares MSCI United Kingdom
is down by more than 14%, greater than the 6% loss in
CurrencyShares British Pound
. This compares to a loss of only about 7% for the
SPDR S&P 500
Some of EWU's losses can be attributed to the more than 20% drop in shares of
in the past month, after its problems in the Gulf of Mexico. BP accounts for 7.7% of EWU and is the second largest holding in the ETF. As the U.S. government opens up a commission to look into the Deepwater Horizon accident, with BP at the center of attention, shares are likely to be a further drag on the ETF.
The big question for investors is whether or not the downtrend in the pound and British equities will continue, or if confidence in Britain's markets will pick up after the new leadership gets a chance to settle in.
Right now, the government must convince markets that it is going to be able to make meaningful change on the economic and fiscal picture in the United Kingdom. The U.K. is not like Greece in that its economic destiny is more in its own hands, but foreign investors, the losses may be equal if it reaches a crisis stage that requires a devaluation of the British pound.
Finally, while Britain has an advantage, it also has a weakness. It is not as fully integrated into the European system. Where Greece could turn to the EU for a bailout, Britain may be forced to turn to the IMF. That happened in the mid-1970s and the IMF forced severe austerity measures at the time, the political effects of which contributed to the eventual rise of Thatcherism.
It will be up to investors to gauge their confidence in David Cameron before investing in either EWU or FXB. The success of both in the short, mid, and long-term will much depend on whether the new administration can govern in a manner that will convince investors that Britain will not go the way of Greece.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.