By Gavin Finch and Morwenna Coniam Sept. 18 (Bloomberg) -- The pound weakened beyond 90 pence per euro for the first time in four months and gilts climbed on concern U.K. banks need to do more to purge their balance sheets of toxic assets. Britain’s currency also tumbled against the dollar after Lloyds Banking Group Plc, the nation’s biggest mortgage lender, said it may pull out of the government’s asset-insurance program after the Financial Times reported that the bank’s capital position was too weak to do so. Two-year government bonds rose for the first time in three days. “They’ve highlighted some of the problems in the U.K. banking system,” said Ian Stannard, a currency strategist at BNP Paribas SA in London. “Rates are going to remain low in the U.K. for some time, so that’s going to weigh on sterling. The pound is going to come under significant pressure.” The pound depreciated 0.4 percent to 89.99 pence per euro at 12:59 p.m. in London, after earlier dropping to 90.11, the weakest level since May 13. The pound fell about 2.7 percent against Europe’s single currency this week in the biggest drop since March. Sterling slid 0.7 percent to $1.6343, extending its loss this week to 1.9 percent. The pound lost more than 5 percent against the euro since the end of June after climbing 12 percent in the first half as the Bank of England increased the size of its asset-purchase program and concern deepened that the economic slump may persist. The pound will fall to parity against the euro in the first quarter of 2010, according to BNP Paribas. Lloyds Discussions Lloyds said today in a statement it’s in discussions with the Treasury over possible alternatives to entering into a program to insure 260 billion pounds of risky assets. The pound stayed lower after Britain posted the biggest budget deficit for any August since modern records began in 1993 as the recession destroyed taxes and jobless benefit costs soared. The 16.1 billion-pound ($26.3 billion) shortfall compared with a 9.9 billion-pound deficit a year earlier, the Office for National Statistics said in London today. The median of 16 forecasts in a Bloomberg survey was 17.6 billion pounds. The yield on the two-year gilt fell four basis points, or 0.04 percentage point, to 0.78 percent. The yield on the 10-year security dropped three basis points to 3.69 percent. The difference in yield, or spread, between the two securities widened to 291 basis points, the most since at least January 1992, when Bloomberg began collecting the data. The yield on the March 2010 interest-rate futures contract slid to 0.83 percent today, down from 1.28 percent a month ago and 1.64 percent at the end of the first half.

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