British banks have found themselves in quite the predicament, which may threaten the health of Britain’s economy and related exchange traded funds (ETFs).

Low Reserves. It is calculated that Britain has less than $61 billion in foreign reserves with foreign liabilities of U.K. banks at $4.4 trillion, or twice Britain’s annual GDP, reports Ambrose Evans-Pritchard for Telegraph. The British sterling has fallen 10 cents to $1.39 against the dollar in just two days.

Fearful Markets. The U.K. gross public debt burden has increased 11.8% in one year and the market is fearful of a pending collapse of the banking system. The International Monetary Fund (IMF) has announced that the full nationalization of some British banks could be quite possible. It is predicted that if Britain were to forget its $4.4 trillion debt, then it would add pressure to global financials, iShares S&P Global Financials (IXG) with holdings of 7.9% in the United Kingdom, and drag the world into a deep depression.

Expensive Proposition. But the United Kingdom will benefit from the sterling, which is still a major global currency, and it has access to more funding. It is estimated that the cost of recapitalizing the U.K. banking system would cost around 5.7% of the its GDP.

• NETS FTSE 100 Index (LDN): down 9.5% in the last week; down 2.4% in the last month

• iShares MSCI United Kingdon (EWU): down 12.6% in the last week; down 11.1% in the last month

Tags: British Pound, Currency ETFs, Europe, EWU, Financial, Global ETFs, IXG, LDN, Sector ETFs, United Kingdom