Few would bet against a big win for Britain's revived opposition Conservatives at the next election, but markets fear the worst case scenario for the investor could yet materialize - a hung parliament. Political risk in Britain is back on the radar after a recent attempt to destabilize Labor Prime Minister Gordon Brown from within his own party knocked the pound lower. A hung parliament - last seen in 1974 - or a tiny majority for the victor after an election which Brown must call by mid-2010 would send shivers through markets. “Markets are hoping that come May or June, we enter a period of strong government,” said Philip Shaw, chief economist at Investec. “Were that not to be the case, it's easy to envisage a run on sterling and gilts selling off.” Political analysts say the best the Labor government can hope for is to stop the Conservatives gaining a workable majority in an election which Brown must call by June 2010. The best for Labor, however, would be the worst for markets looking for tough action on the ballooning public finances. “Without either party getting a clear mandate in parliament, there would be a danger that those tough policies aren't carried through,” said Investec's Shaw. The Labor government has suffered regular rebellions within its own ranks as did its Conservative predecessor in the 1990s. A narrow majority would allow a small band of disaffected government parliamentarians to scupper or delay legislation. Credit ratings agency Standard & Poor's has said Britain could lose its triple A rating over concerns about the debt burden. The IMF warned Britain this week to get its books in order, saying the market's patience “will not last forever”. Investors are already uneasy about Labor's plans to deal with record public borrowing, forecast at 175 billion pounds - more than 12 percent of GDP - this year. The Conservatives haven't been very convincing either. And in a hung parliament, Britain's third main party, the Liberal Democrats, could find themselves kingmakers eager to push their own fiscal agenda - an unknown for many investors. Such an unsettling election outcome is not impossible, analysts say. “At the moment, if things carry on we will have a fairly big Conservative win, not a landslide. I don't envision a Labor win at all,” said Julia Clark, head of political research at pollsters Ipsos MORI. “But if the economy does recover and the Tories run into any kind of trouble, we could be looking at a hung parliament.” To scupper the Conservatives chances of a decent majority, Labor needs the economy to recover faster than anticipated and the electorate to lose some of its confidence in the Conservatives, led by 42-year-old Oxford graduate David Cameron. The latest opinion polls give the Conservative around a 15-point lead over Labor - more than enough to destroy Labour's 63-seat majority and establish a stronghold. But if the Conservative poll lead drops to five points that could indicate a hung parliament was in the offing, Clark said. The Conservatives know they can't be complacent and, at some point, they must fill the policy gaps critics point to. “Whilst the Conservatives have done well in the polls, they haven't been very explicit on policy,” Investec's Shaw said. “It may be they have to outline a number of policies that the electorate finds unattractive. Accordingly, it's not impossible that we see a smaller majority, a hung parliament or even perhaps a small Labour majority.” The other big unknown is the economy. Brown is expected to wait until the last minute before calling an election, in part to give the economy as much time as possible to recover. That strategy could pay off.
