July Currency Update

Euro zone politicians are doing their level best to put on a brave face about Greece’s predicament. Prime minister Papandreou deliberately subjected himself to a parliamentary vote of confidence, which he won with the assistance of a new finance minister. Jean-Claude Juncker, chairman of the Ecofin group of Euroland finance ministers, regularly gives his assurance that it will all work out for the best. Chancellor Merkel and President Sarkozy have promised to reach a compromise on how the rescheduling of Greek debt should be treated. Everyone is trying to present a combined and confident impression, reassuring investors that there really is nothing to worry about; Greece is not going to default on its debts.

Outside the euro zone scepticism is by no means universal but nevertheless widespread. A common concern is that the current bailout scheme, cobbled together in haste last year, is no more than a temporary fix. Who will lend money to an even more heavily-indebted Greece when Brussels turns off the tap? The fear is that the bailout will merely postpone the day of reckoning, leaving Greece with an extra €250 billion of debts and an exceedingly hacked-off populace.

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By and large, investors would prefer to believe the politicians. Few of them would benefit from the financial crisis that might well attend a Greek bankruptcy. Most would probably suffer losses as a result of the economic slowdown or recession that could follow. So they tend look on the bright side, focusing on the likelihood of higher euro interest rates instead of the off-chance of catastrophe. But they cannot totally ignore the possibility, hence the weekly changes of sentiment they have been demonstrating for the last month and a half.

Since the beginning of May the sterling/euro exchange rate has covered a six-cent range, with half a dozen major reversals, without actually going anywhere. On 2 May the pound traded at €1.1250; on 3, 10 and 23 June it traded at an identical level. Most of these swings have been caused by the ebb and flow of pro- and anti-euro sentiment. Occasionally they have been the result of sterling’s well-practised ability to shoot itself in the foot.

In late June the Bank of England’s monetary policy committee published the minutes of its June meeting. As expected, only two MPC members voted for the interest rate increase that would enhance the value of sterling in the eyes of investors. However, also – and unexpectedly – in the minutes were suggestions that rates will not go up this side of Christmas and that there might even be another round of asset purchases to stimulate the economy. The asset purchase programme (quantitative easing, printing money, call it what you will) was not popular with investors when the bank bought £200 billion of government and corporate bonds. For more than year investors have assumed that there would be no extension of the scheme. The minutes of the MPC meeting suggested that .an extension of the programme remains on the table and investors were less than delighted.

The coming weeks could be challenging ones for the euro. First the Greek parliament must vote to approve €76 billion of new austerity measures. Second, it must sell the idea to voters. Third, it must persuade the EU that it will do more than pay lip-service to the spending cuts and privatisations. Fourth, holders of Greek government debt must be convinced that they will be better off renewing their loans than taking the 30 cents in the euro (or whatever it might turn out to be) that they would get in the event of a default.

It is not an impossible task but it is not an easy one. Expect more swings for sterling/euro as each new development brings either a cheer or a hiss.

What next? 

Call +44 (0)20 7428 4910 (Open Monday to Friday 9.00am–7.00pm)

> Open a Currency account today

> Request a call back

> Ask questions about Currency Exchange

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This entry was posted on Friday, June 24th, 2011 at 5:00 pm and is filed under Bank account, Currency exchange, Finance, Money transfer . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “July Currency Update”

  1. Pamela Cullen Says:

    China is not mentioned: surely it is the backing of China that is holding up the Euro in buying government bonds and is just waiting to step a bit further into Greece?


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