The first European country to suffer from the ongoing credit crisis might also be the first nation to emerge from the crash. Though this won’t happen any time soon, investors should start scouring over the rubble following a total collapse of domestic assets, including the British pound.

The United Kingdom is suffering from its worst bout of credit deflation and bank insolvency since the 1930s.

Most banks are already insolvent as the British government continues to raise its stake in Royal Bank of Scotland and Lloyds – both ill-supported by negative equity and massive liabilities. Shares prices of both banks are down more than 80%.

The British pound has crashed a cumulative 33% since peaking against the dollar and might have another 15% or 20% to fall from current levels. Among the major currencies, sterling is the worst performer by far.

According to The Bank of England’s currency grid, the pound is the second cheapest major currency in the world after the Swedish krona. The British central banks’ currency index pegs the pound at 77.8 or down 22% against a basket of major currencies since 2005.

British equities as defined by the London FTSE-100 Index now trades at just 7 times trailing earnings accompanied by a 5.6% dividend yield – almost twice the yield generated by gilts or British government bonds.

Like other bombed-out markets around the world since 2008, the British stock market is perhaps one of the most attractive on a relative scale because of the currency’s collapse. The last British currency crisis in 1992 – when the pound devalued and exited the European Exchange Rate Mechanism – resulted in a big buying opportunity for stock market investors.

As a rule, it pays for investors to buy domestic stocks following a currency crash.

Most recently this worked brilliantly following the Scandinavian banking crisis in 1989-1991, the U.S. dollar bear market from 1989 to 1995, Britain’s humiliating exit from ERM in late 1992 and the Asian and Russian economic depressions in 1997-1998. Investors subsequently earned big profits buying local shares after these respective currencies collapsed or were sharply devalued.

Another country in deep economic depression is Iceland where the stock market and currency have crashed more than 90% from their highs. At some point, Icelandic assets, whatever their true value, will also rank as the speculation of a lifetime.

A deeply oversold currency is one of the prime ingredients for a big stock market rally – especially in a country like Britain which relies heavily on U.S. and inter-European exports.

A sharply weaker pound makes British goods much cheaper compared to its competitors. The problem with England today, however, is that her exports as a percentage of GDP has shrunk, relying far more on financial services revenue. And that sector of the economy has imploded.

Nobody knows when the bottom will hit global markets. We’ve been in a nonstop freefall since last summer with seemingly no end in sight. But as this historical crisis finally bottoms, those markets with the cheapest currencies are poised to recover the most, including the United Kingdom.