Markets gear up for bloodbath on Monday Posted by Sophy at 7 03 PM on Saturday, May 8

Britain  faces financial meltdown tomorrow if the Tories and Lib Dems fail to reach a deal.

Just as the nation pulls out of a painful recession, the uncertainty of a hung parliament threatens to push us back over the brink.

Experts fear a weak and divided government will fail to push through the harsh measures needed to tackle the county’s £890 debt mountain.

Traders are gearing up for a bloodbath tomorrow when the financial markets re-open after the weekend.

Last night top economists urged David Cameron and Nick Clegg to move quickly and decisively.

Vicky Redwood, UK economist at analysts Capital Economics, said: “The quicker the new Government, whoever it comprises, offers reassurance that it is serious about tackling the fiscal crisis, the better.”

And Howard Archer, Chief UK Economist at forecasters IHS Global Insight, warned: “The longer any horse trading goes on between the parties, and the more fragile any agreement is perceived to be, the more sterling, gilts and equities are likely to suffer."

On Thursday the markets reacted to Britain’s first hung parliament since 1973 by dumping the pound.

Sterling nosedived to a one year low against the dollar, and even lost ground against the euro which has been torpedoed by the Eurozone debt crisis.

Britain’s biggest companies saw £35 billion wiped off their value yesterday as the FTSA plunged, and gilts also lost ground.

Experts explained the drops were because it is feared the new government will be too weak to make the painful spending cuts Britain needs to balance the books.

Mr Archer explained: “The markets hate uncertainty, so will be particularly concerned if they sense that the new government could fall at any time.

"The fear is that whatever government emerges, it will not be in a strong enough position to survive for an extended period and to take the necessary sustained strong action to rein in the public finances.”

The prospect of a financial meltdown comes just after Britain has started to emerge from the recession.

Figures out on Wednesday  will show a reduction in unemployment, with the number on the dole dropping by 32,900 in March.

Other positive economic news will include a robust high street performance from the British Retail Consortium and increased manufacturing and industrial output from the Office of National Statistics, both on Tuesday.

But the current uncertainty increases the risk of the country plunging into a dreaded “double-dip” recession.

Experts urged the three parties to act decisively to cut the deficit, to make sure Britain does not go the same way as crisis-hit Greece.

Economist Jonathan Loynes, of Capital Economics, added: “Whether the markets continue to see the UK as very different from Greece depends crucially on the prospects for decisive action to tackle the UK’s own fiscal crisis.

“It is certainly hard not to believe that those prospects would have been somewhat greater under a clear Conservative majority, given the party’s pledge to hold a Budget within 50 days of the election and to cut the budget deficit more quickly than current Government plans show.”

The City will be reassured that a deal between the Conservatives and Lib Dems is likely to be revealed tomorrow.

The Tories hope to make an announcement after David Cameron meets his full parliamentary party at 6pm on Monday evening.

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