LONDON BRIEFING:Sterling's slump is a reflection of the increasingly parlous state of UK finances, writes FIONA WALSH.

FIRST THE banking collapse, now a currency crisis – as markets continued to register their deep disapproval of the government’s latest bank bailout, the spotlight switched yesterday to the foreign exchanges, where the recent slump in the pound is threatening to explode into a full-blown currency crisis.

Sterling yesterday suffered its biggest one-day decline against the dollar since the UK crashed out of the Exchange Rate Mechanism in 1992, tumbling below $1.39. In the 48 hours since the government presented its new banking rescue plan to an increasingly sceptical City, sterling has slumped by more than 10 cents against the US currency and also hit new lows against the Japanese yen. Against the euro, sterling slid almost 3 per cent, taking it closer to parity.

The huge debts being taken on by the government in its attempt to spend the UK’s way out of recession were already causing serious concern. Chancellor Alistair Darling has already forecast borrowing will reach £118 billion for 2009/10, representing 8 per cent of GDP. But the fear now is over the potentially massive scale of the new bailout – whether it succeeds or fails, the price could simply be too high.

Sterling’s slump is a reflection of the increasingly parlous state of the nation’s finances. There were rumours yesterday that the UK might even suffer the ignominy of having its credit rating downgraded, a fate which Spain suffered on Monday. That would blow an even bigger hole in the government’s finances and put paid to any lingering chance of the bank bailout succeeding.

The mood was not helped by a brutal assessment of prospects for UK plc by Jim Rogers, the veteran American investor. The UK “is finished,” he said, urging investors to sell any sterling they might have. “I hate to say it, but I would not put any money into the UK.”

The bad news for Britain is that Rogers has a track record of getting it right – he made his millions after founding the Quantum Fund with billionaire trader George Soros and is also credited with calling the start of the commodities boom in 1999.

Doubts over the latest bailout package saw banking shares hammered once again yesterday as fears grew over a wholesale nationalisation of the industry.

The biggest victim this time was Lloyds Banking group, the newly merged Lloyds TSB/Halifax Bank of Scotland group. Its shares crashed by almost 50 per cent at one stage, ending the session 20.2p lower at 44.8p. An attempt at a rally by Royal Bank of Scotland swiftly petered out with the shares slithering another 1.3p to little more than 10p. And there was a further double-digit decline for Barclays.

There was evidence that the short-sellers are back in action in the banking sector following the recent lifting of the ban by the Financial Services Authority, with Lansdowne Global yesterday raising its short position in Barclays from 0.25 per cent to 0.26 per cent and Paulson declaring a 0.79 per cent short in Lloyds Banking Group.

Amid the deepening crisis in the sector, the insistence by Barclays that it has no need of government help is becoming increasingly perplexing. The bank has repeatedly said in recent days that it is on course to exceed consensus forecasts of £5.3 billion for 2008, down from just over £7 billion the previous year, indicating that there are no more toxic shocks to come.

It seems extraordinary that Barclays alone should be in much better shape than the rest of the industry, although it had a narrow escape when RBS outbid it in the disastrous auction for ABN Amro. The loans it has on its books must surely be as toxic as those of its peers. Its shares crashed by 25 per cent on Friday, lost another 10 per cent on Monday and ended last night a further 17 per cent down at just 69p – their lowest level in more than 17 years. At this level, the bank is valued at a mere £6 billion.

Some analysts fear that the Barclays board may be in denial after the traumatic events of recent weeks and the bombed-out share price is certainly saying that more writedowns must be on the way.

• Fiona Walsh writes for the Guardiannewspaper in London