As 2011 drew to a close it seemed we were further away than ever to finding a
solution to the European debt crisis. We lost count of the number of EU crisis
meetings that were held in 2011, each one aimed at finding a solution to the debt
issue and restoring confidence in the global financial markets but ultimately failing to
do so.
As 2012 begins, confidence in the Eurozone continues to wane with data releases
this week pointing to a sharp slowdown in economic activity in the Eurozone.
It was Greece that was the catalyst for the crisis way back in the spring of 2010 when
falling tax revenues due to the recession meant the Greek government had to
borrow more and more money to balance its books. Since then Ireland and Portugal
have joined Greece in becoming the most affected Eurozone countries with all three
having to force through tough austerity measures.
A weakening in the value of the Euro confirms just how perilous the situation has
become. Today Sterling peaked at a 16-month high against the Euro at £/€ 1.2113, a
fall of 7 cents in just over two-months. With some economists pointing towards £/€
1.25 should Eurozone debt sales disappoint, it seems that Euro buyers will benefit
going forward. Indeed, there is nothing at the moment to suggest anything other
than further Euro weakness.
Austerity measures will prevent any tax cuts or spending increases from EU
Governments so pressure is likely to build on the European Central Bank to reduce
interest rates. If you add in ratings downgrades, rising bond yields and worries over
European banks’ balance sheets the future looks bleak, even without a possible
Greek default.
If you are holding funds in Euros the biggest concern should be bank’s balance
sheets. It is hard to forget the endless queues outside of every Northern Rock bank
in 2008, so will that scene be repeated outside La Caixa in Spain, Banca di Roma in
Italy and BNP Paribas in France? Those scenes were due to the whole banking world
exploding after US investment house Lehman Brothers crashed and a default by
Greece would eclipse the Lehman Brothers crash.
Following the collapse of Northern Rock, the UK Government launched the Financial
Services Compensation Scheme (FSCS) so savers would get back up to £85,000 per
person per institution should a bank fail from 1st January 2011. The limit is applied
‘per individual, per bank’ so joint account customers can get up to £170,000
refunded if their bank fails.
To date, there is no Eurozone equivalent to the FSCS so a customer holding €50,000
in a bank account is at risk of losing the whole amount if a bank fails. So how can you
protect yourself from a weakening Euro and the funds you are holding?
Moving funds back into a UK bank account would be a very sensible thing to do,
taking advantage of the FSCS scheme and taking the view that any exchange rate
losses are insignificant compared to the risk of losing all the money you have. To
reduce the foreign exchange rate losses, you can use a specialist currency broker.
SAT Worldwide are a regulated UK-based foreign exchange broker who trades tens
of millions of pounds of foreign currency every year for private customers who are
buying and selling Euros. There are no costs, no charges and no commission and
every customer has their own personal account manager whose aim is to make the
process simple and straightforward. For more information, visit
www.satworldwide.co.uk or contact +44 (0) 1491 577 550 and ask for Adam Cotton.