Author: Ben Ashby

It seems at the moment that every few days, someone reheats Denis Healey’s forlorn figure heading to Washington and declares that the UK is heading for a 1976 IMF rerun. It reads well, and despite Rachel Reeves’ growing list of problems, it’s also wrong.

1976 was a managed float with a foreign-currency problem

First, we need a trip down memory lane. Sterling had been floating since June 1972, after the UK left Europe’s “snake” and abandoned fixed parities. 

But it wasn’t a free float: the authorities leaned on the rate with market operations, swap market fiddling, and outright intervention. Call it a dirty float, not a peg, but the institutional mindset was still “defend sterling”; this was partly due to the legacy financial arrangements of Britain’s empire and the issue of Sterling balances. 

This raises the obvious question of why the UK needed the IMF money if the pound could fall? First, because the UK had already borrowed short-term support from the G10 (plus Switzerland): a $5.3bn credit line arranged in June 1976 to help defend the currency. That facility matured in the December. 

The Americans were explicit: if Britain couldn’t repay, it should go to the IMF. The government duly sought a $3.9bn standby (then a record), with classic conditionality. In December 1976, Healey signed the Letter of Intent, and the IMF Board approved it on January 3, 1977. In practice, only about half the line was drawn, but it shored up reserves and credibility. 

Second, then as now, policymakers still treated exchange-rate weakness as a test of national solvency. But in 1976, that mattered more due to the issue of Sterling balances. These were short-term debts owed to foreign governments that could be converted into foreign currency.

The UK’s foreign-currency reserves were thin relative to the stock of foreign-held sterling. If foreign holders lost faith and asked to redeem those debts for foreign currency, a run could swamp the Bank’s firepower. That’s why repaying the G10 line and topping up reserves were central. 

‘The past is a foreign country’

The vast majority of the UK government’s debts are held in gilts denominated in sterling. Foreign-currency bonds exist but are a rounding error by comparison. The sovereign taxes in sterling, spends in sterling, and its central bank settles in sterling. That’s a world away from a currency-mismatch crisis. 

And the money it borrows in is liquid. Sterling is the fourth most-traded currency worldwide and still a small but steady reserve asset (roughly ~5% of allocated reserves last read). Liquidity, institutions, asset base and property rights count in a crisis. 

Could the UK end up in an IMF programme anyway? Only if investors lose faith so comprehensively that sterling-denominated debt can’t be rolled at any price. Possible in theory; very unlikely in practice. In Britain, the exchange rate is the usual release valve. 

But…there is a plausible stress point in the financial sector

Where things can—and do—break is the dollar. UK banks and certain ‘non-banks’ habitually need USD to fund dollar assets and client hedges. A significant portion of that demand is reflected in FX swaps, resulting in large, short-dated “hidden” dollar obligations that don’t appear neatly on balance sheets. The BIS has documented this for years; it’s big and it bites under stress.

We saw the movie in miniature around Credit Suisse in March 2023: the Fed and peers ramped USD operations from weekly to daily to pre-empt a scramble. London’s pipes carried some of the flow, even if the epicentre was Swiss. 

Though the UK’s major banks are robust, there are scenarios where they – and the London-based Eurodollar market - could struggle. One of those scenarios is Government ineptitude triggering a prolonged fiscal crisis. In those scenarios, the Bank of England relies on the Fed’s standing swap line—established permanently since 2013 and activated as needed—to inject dollars into the UK system. That’s the institutional fix to a market-structure problem. 

…and the 2025 wrinkle

The facility still exists, but its use is ultimately at the Fed’s discretion, and the politics around Fed independence are in flux this year. 

Questions are already being raised about whether cross-border dollar backstops would be as readily offered in a second Trump term. That uncertainty—not IMF conditionality—is the credible modern tail risk for the UK. 

Bottom line

1976 was a reserve and rollover problem in a world where the UK still tried to “manage” sterling and had G10 debts coming due. Today’s sovereign is mostly funded in its own money, which remains deep and tradable. 

If Britain seriously stumbles, there could be a dollar squeeze through FX-swap funding, but this may be manageable through the private sector. If not, while it might result in a trip to Washington with a cap in hand, it would not be to see the IMF but more likely the Oval Office.