Articles from June 2010

Pound hits fresh 19 month high against euro

The Pound Sterling has hit a new 19 month high against the euro as the 16 nation currency comes under renewed pressure.
Pound hits fresh 19 month high against euroThe Pound rose almost half a cent to 1.2327 euros, its highest level since the immediate aftermath of the financial crisis in November 2008.

Markets are concerned ahead of a deadline this week for European banks to repay loans taken out a year ago at low interest rates.

Against the dollar, however, the pound fell more than half a cent to $1.5029.

The European Central Bank will offer funds on Wednesday to banks looking to repay loans later this week.

The euro has been under pressure since concerns about high levels of government borrowing triggered a debt crisis earlier this year.

But it is not just a weak euro that is boosting the pound.

Sterling has also benefited from comments made by Bank of England Monetary Policy Committee (MPC) member Andrew Sentance on Monday, in which he said the UK would need to start raising interest rates soon.

Mr Sentance voted to raise rates at an MPC meeting earlier this month.

Analysts said that if inflation remains well above the Bank’s 2% target rate, the pressure to raise rates will increase. Inflation, as measured by the Consumer Prices Index, currently stands at 3.4%.

Higher interest rates make sterling a more attractive investment and tend, therefore, to increase its value.

How valuable is your euros cash for the future- exchange home delivery service

Your pile of foreign euros left over from your last European holiday might not keep it’s value for the future.
euros cash exchange home delivery service
With the ongoing currency and european credit crunch, not all euros are the same and some might be worth more than others in the future.

Each euro banknote’s serial number tells you which country created it.

Worries about sovereign states’ differing abilities to repay their debts prompted world leaders at the G20 Summit in Toronto to pledge they will half their national budget deficits by 2013. But translating words into action will be a more difficult challenge for some than others.

For a few, the challenge could prove simply impossible.

Now rising fears about southern European countries’ financial stability mean it could pay to be able to read the code on your euro.

Some Germans are already insisting on holding on to euros issued in their own country and passing on those backed by southern states. They know from not too distant history what it feels like to be left holding worthless paper which used to be official currency.

All euros are backed by the European Central Bank but the serial numbers prefixed with X may be regarded as most secure because they are issued by Germany. N is also a good prefix, because these come from Austria. P, L, U and Z prefixes may also be favoured because these are issued by the authorities in Holland, Finland, France and Belgium.

Code     Country
Z            Belgium
Y           Greece
X           Germany
V          Spain
U          France
T          Ireland
S           Italy
P           Holland
N          Austria
M         Portugal
L           Finland
H          Slovenia
G         Cyprus
F          Malta
E          Slovakia

If you share widespread fears that the euro cannot last in its present form, you might want to avoid notes with the prefixes F, G, M, S, T or Y. These are issued by Malta, Cyprus, Portugal, Italy, Ireland and Greece- highlighted.

If you have some euro cash left over from your last holiday then Wise Money has a great value euro cash exchange service which includes home/ office delivery service.

Sterling rises above 1.5 US Dollar whilst Fabio slumps

Recent US data has managed to hold back the US Dollar suggesting that cyclical factors and not just risk aversion are beginning to play into foreign exchange markets.
Sterling rises above 1.5 US Dollar whilst Fabio slumpsThis can be seen with Sterling breaking through the key 1.50 level and even the flagging Euro is reaching nearly 1.24 against the greenback at the time of writing.

The Pound has found further support with talk in the market that a UK clearer needs to buy cable today for dividend payment purposes.

The effect is not likely to be excessively large, however it may well be helping underpin the pairing in recent trade.

Sunday saw the biggest non event after a certain football match with the G20 summit which like England, the communiqué failed to get a grip on challenges that face them.

Maybe a little harsh as they agreed new targets for reducing deficits and sovereign debt, however questions regarding tougher capital and liquidity requirements for banks were delayed until November’s summit in Seoul, providing leaders with time to work out their individual differences.

Sterling goes higher against the euro

The pound strengthened to 1.22 against the Euro yesterday for the first time since November 2008.

Sterling continues to benefit from the UK budget announced earlier this week and the news that one MPC member voted for a rate hike this month. A strong response from the credit agencies took away fears that the UK’s AAA rating could be downgraded.

Concerns over the European debt crisis were on the rise again yesterday with Greek credit default swaps hitting a record high.

ECB president Trichet said he is “pleased” with Germany’s decision to concentrate on fiscal discipline, he also commented that the idea that austerity measures could trigger economic stagnation is “incorrect” and he does not think the risks around deflation will materialise.

Another cause for concern in the Eurozone is the requirement for European banks to repay the $540bn of ‘special’ 1-year loans that they borrowed from the ECB.

The added problem here is that a number of the banks used the loans to buy up bonds in Greece, Spain and Portugal – fixing in a healthy interest margin in the process. Now they have to repay their ECB loans, the banks may decide to offload some of these bonds, which could reignite tensions in European financial markets.

Soros warns Germany to stop cuts or leave EMU

Investor George Soros has warned Germany to leave the euro unless it is willing to embrace a growth strategy, calling Berlin’s current austerity plans  a threat to democracy and political stability in Europe.
Soros warns Germany to stop cuts or leave EMU“German policy is becoming a danger that could destroy the European Project. A collapse of the euro cannot be excluded,” he told the German weekly Die Zeit.

“Unless Germany changes policy, its withdrawal from the currency union would be helpful for the rest of Europe. At the moment Germany is pushing its neighbours into deflation: this threatens a long phase of stagnation, leading to nationalism, social unrest, and zenophobia. It endangers democracy,” he said.

Mr Soros saw the political effects of wage cuts first-hand during the Great Depression, and narrowly survived the Holocaust as a Jewish boy in Nazi-controlled Budapest. He has since dedicated much of his wealth to philanthropic works promoting freedom and pluralism across the globe, mostly through Open Society institutes.

His comments reflect growing alarm in influential circles on both sides of the Atlantic over the 1930s-style policies of wage cuts and debt-deflation being imposed up the Club Med bloc, Ireland, and parts of Eastern Europe by the EU authorities, at the behest of Berlin.

President Barack Obama clearly had Germany in mind when he wrote a letter to fellow leaders before the G20 summit in Canada this week that surplus countries should do more to shore up global demand. “Our highest priority must be to safeguard and strengthen the recovery: we cannot let it falter or lose strength now. Should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed,” he wrote.

China has deflected G20 criticism by starting to free the yuan, leaving Germany facing the full wrath of Washington.

While the German economy is not in itself large enough to shape global events, US officials fear that Berlin’s dominant influence over the European Central Bank and the fiscal machinery of monetary union is dragging most of Europe into an economic swamp. Germany has raised the bar for every eurozone country by announcing €80bn of belt-tightening from next year.

Nobel laureate Paul Krugman told the German press earlier this week that the country was committing the same error as the United States in 1936-1937, or Japan in the 1990s, by withdrawing stimulus before recovery has taken root.

“I don’t have a problem with trying to balance the budget in five or 10 years. The question is whether one should start when the economy is at 7 or 8 percent below its normal capacity and interest rates are at zero. Now is not the time to be worried about deficits.”

Professor Krugman said there was a risk of a “domino effect” reaching Spain and Italy if Bundesbank chief Axel Weber takes over as head of the ECB and fails to offer enough monetary stimulus to keep these countries afloat.

One analyst said that Mr Weber faces an impossible task. “Either they do more QE (quantitative easing), in which case it will set off inflation in Germany and cause Germany to leave EMU: or they don’t do more QE, in which case it will lead to deflation in Southern Europe and force them out of EMU,” he said.

Mr Soros said Germany was treating the deeply-flawed Maastricht Treaty as it were a “sacred text”, warning that monetary union cannot endure for long as a narrow construct based on debt and deficit ceilings.

He said wage rises in Germany are imperative to help lift the whole eurozone, allowing peripheral economies to claw their way out of trouble without fighting the extra headwinds of deflation.

“The truth is that what we have in Europe is not a currency or sovereign debt crisis as many people think, but a banking crisis,” he said.Mr Soros argued that the weaker states cannot easily fund their deficits any longer because some banks are purchasing fewer bonds as a result of damaged balance sheets.

New UK budget boosts the Pound

Chancellor George Osborne’s produced the toughest Budget in a generation yesterday with Britain facing drastic cuts of 25% to government departments.
New UK budget boosts the Pound
The exception will be those departments with “protected budgets,” such as the National Health Service and foreign aid.

Other key take outs include an increase in the VAT from 17.5% to 20% from January next year and a new £2 billion levy on the banks.

The budget reveals a more rapid fiscal response than that planned by the previous Labour government. The Chancellor said, “This emergency budget deals decisively with our country’s record debt.”

The budget also found support from Fitch, the rating agency, who stated the budget “…sets out an ambitious deficit reduction path that, if delivered upon, will materially strengthen confidence in UK public finances and its ‘AAA’ status.” The Office for Budget Responsibility cut it’s economic growth forecast to 1.2% this year and GDP growth next year has been cut to 2.3%.

The news provided further support for Sterling yesterday as it rallied against the Euro and the Dollar. Pre-budget we were trading GBP/EUR 1.1960 and GBP/USD 1.4730, the markets view this as a credible plan and we currently sit at 1.2139 and 1.4924 respectively.

Over in the US and existing house sales numbers were below par despite the continuing tax incentives for the housing market. Although we saw little reaction in the currency markets, (EUR/USD currently sits at 1.2279 from a high of 1.2320 yesterday) equities did sell off at the close leaving a weaker outlook for stocks across Europe and Asia.

China ends currency beg to US Dollar

China’s announcement over the weekend that it was ending its currency’s two year peg to the US dollar boosted Asian stock markets.
China ends currency beg to US DollarJapan’s benchmark Nikkei 225 stock index gained 177.18 points, or 1.8pc, to 10,172.20 in the morning session and Australia’s S&P/ASX 200 was up 0.7pc at 4,604.30.

Hong Kong’s Hang Seng index climbed 1.4pc to 20,571.40. China’s Shanghai Composite Index added 0.6pc to 2,527.22. Benchmarks in Singapore and Taiwan all advanced in early trading.

Investors gained confidence from Beijing’s announcement Saturday that it would determine the exchange rate from multiple currencies, rather than the dollar alone, analysts said.

The yuan’s value has been pegged to the dollar since the global financial crisis took hold in 2008, causing major friction with countries who say it is undervalued for China’s own benefit.

The Chinese central bank also said it plans no major exchange rate adjustments, dousing speculation over possible one-off moves in the yuan’s dollar value. That reduces uncertainty, allowing some investors to plunge back in after weeks of holding back.

The impact of any change in the yuan’s value will be mixed, he noted, with exporters likely to suffer and importers and airlines, whose debts are denominated in dollars, gaining.

The yuan’s value has been pegged to the dollar for two years, causing friction with countries who say it is undervalued for China’s own benefit. A stronger yuan would make Chinese exports more expensive and bring relief to foreign manufacturers that have struggled to compete.

The official exchange rate for China’s currency stood unchanged Monday morning in line with the central bank’s warning the value of the yuan would not dramatically rise after its two-year peg to the dollar ended.

The People’s Bank of China left the yuan’s parity rate against the dollar unchanged Monday at 6.8275, the official Xinhua News Agency said. The rate is a weighted average of prices given by market makers, excluding highest and lowest offers.

Spanish debt worries amid €250bn rescue plan confusion

European debt markets remain under high stress on persistent reports that Spain is in secret talks with EU officials and the International Monetary Fund for a support package of up to €250bn (£208bn), the largest rescue in history.Spanish debt worries amid €250bn rescue plan confusionThe spreads on 10 year Spanish bonds jumped to a post EMU high of 224 basis points above German Bunds as traders brace for a crucial auction by Madrid.

The relentless rise in bond yields replicates the pattern seen in Greece at the onset of crisis. Spain must raise €25bn of debt in a cluster of auctions in July.

Elena Salgado, Spain’s finance minister, reacted angrily to a report in the Spanish daily El Economista claiming that the support plans are well advanced.

“It has been denied by the Spanish government, by the European Commission, and by the IMF. How much more can we deny it?” she said.

The story refuses to die, however. Three German newspapers have run similar stories over recent days, citing German sources. The markets are convinced that some form of contingency planning is underway.

El Economista said officials from the EU, the IMF, and the US Treasury had been discussing a credit line of €200bn to €250bn, dwarfing the €110bn package for Greece. Dominique Strauss-Kahn, the IMF’s managing director, reportedly called a secret meeting of the IMF’s Board of Directors to tackle the crisis.

The loan terms would be softer than the draconian budget cuts imposed on Greece, with the lion’s share of the money coming from eurozone states under their €750bn shield.

It is unclear how the EU would finance a full rescue for Spain. Under the Greek formula, the EU-IMF ratio of aid is 8:3, implying an EU share of around €180bn – with a risk that the sums will escalate. The number of eurozone states available to fund the package is shrinking.

The original hope behind the EU’s €750bn “shock and awe” headline was that the announcement of such sums would end all doubts about the political solidarity behind the euro project, but nationalist body-language from EU capitals and daily spats between France and Germany have sapped confidence.

What haunts markets is fear that Spain may be the last line of defence. There can be no easy rescues after that because the money will run out. If investors ever start to question Italy’s public debt – the world’s third largest – they may face a sovereign version of the Credit Anstalt crisis of 1931.

Spanish borrowing costs at new high

The Spanish government’s cost of borrowing has hit a new record hign amid renewed concerns over the state of its economy and public finances.
Spanish borrowing costs at new highThe interest rate Spain is being asked to pay by investors is now 2.23 percentage points higher than that being demanded of Germany.

This widening gap in the bond market marks a drop in confidence in Spain’s ability to repay its debts.

The Spanish cabinet has also approved unpopular changes to labour rules. The changes, which include a cut in the level of severence pay, have prompted a call for a general strike in September.

Spain, which is emerging from a two-year long recession is now pursuing austerity measures. These include a 5% cut to public sector pay in an effort to bring down its borrowing and help restore its credibility among international lenders.
IMF speculation

Its budget deficit is currently running at over 11% of GDP – way above the 3% limit imposed by the EU.

This week the Spanish government has also been forced to deny newspaper reports that it is in talks with the IMF over a Greek-style bail-out package to help it manage its debts.

The Spanish Prime Minister Jose Luis Rodriguez Zapatero is scheduled to meet IMF chief Dominique Strauss-Kahn on Friday, but Spanish officials say the talks are unconnected to the press speculation.

Investors remain concerned about the underlying strength of Spain’s economy.

There are also worries that spending will hamper its recovery from recession, with its unemployment rate of 20% – the highest in the eurozone – a significant concern.

The government has approved long-awaited labour market reforms, which it says will encourage firms to hire more people, easing the jobs crisis.

But the plans have met with demonstrations from unions, who fear the changes will hurt workers’ rights.

Fatal flaws will destroy eurozone within 18 months claims Axa

Analysts at the French financial group AXA see a serious likelihood that the eurozone will break in half or disintegrate, dismissing Europe’s £623bn rescue package for Club Med debtors as a stop gap measure that misdiagnoses the problem.
Fatal flaw will destroy eurozone AXA reveals“The markets are very nervous because they can see that there is a fatal flaw in the system and no clear way out,” said Theodora Zemek, head of global fixed income at AXA Investment Managers.

“We are in a very major crisis that has even broader implications than the credit crisis two years ago. The politicians have not yet twigged to this.”

Ms Zemek said the rescue had bought a “maximum” of 18 months respite before deeper structural damage hits home, with a “probable” default by Greece setting off a chain reaction across Southern Europe.

“It would be the end of the euro as we know it. The long-term implications are at best a split in the eurozone, at worst the destruction of the euro. It is not going to end happily however you slice it,” she said.

The warning came as Spain’s authorities were forced to shoot down German media reports that Madrid was preparing to tap the rescue facility after ructions in the inter-bank market.

Carlos Ocampa, Spain’s treasury secretary, said smaller Spanish banks are struggling to roll over debts but denied that the country is seeking outside help. “The rumour is false,” he said.

Spanish banks increased reliance on funds from the European Central Bank to a record €86bn in May.

Greece’s woes increased further as Moody’s downgraded Greek debt to junk status, saying the “macroeconomic and implementation risks associated with the programme are substantial”. The move is largely symbolic at this point since the European Central Bank has suspended its rating requirements for use of Greek debt as collateral for loans.

Greece is almost entirely shut out of the capital markets. Private investors are believed to have offloaded €25bn of Greek debt on to the ECB as it steps in to shore up the market, shifting the credit risk on to tax payers.

Axa said there was “no chance” that the EU’s €750bn “shock and awe” shield will succeed since it treats Club Med’s debt trap as a short-term liquidity crisis.

In the case of Greece the joint IMF-EU policy will increase Greek public debt from 120pc to 150pc of GDP by 2014, arguably making matters worse.

A number of ex-IMF officials have said the policy is doomed to failure since there is no devaluation or debt relief to offset the ferocious fiscal squeeze, and may endanger the credibility of the Fund itself. The IMF had floated the idea of a debt restructuring but this was blocked by the Brussels.

The strategy assumes that voters in Greece and other Club Med democracies will endure years of pain for the sake of foreign creditors. “It’s a pipedream,” said Ms Zemek.

Contagion from a Greek default would be harder to control than fallout from the Lehman collapse. “This has huge implications for banks. These bonds didn’t just disappear; they went somewhere, allegedly into French money markets and insurance companies, or on to French balance sheets,” she said.

The Bank for International Settlements said French and German lenders have £650bn in exposure to Greece, Ireland, Portugal and Spain, mostly in mortgage and company debt rather than sovereign debt.

The distinction has become meaningless in Greece. The ECB has lent Greek banks €85bn, mostly in exchange for collateral in the form of Greek government bonds.

This has kept Greek lenders alive as they suffer a slow bank run, losing 7pc of their deposit base since last June as wealthy Greeks shift their funds abroad. The ECB support is equal to 20pc of their non-equity funding, according to Lombard Street Research.

Axa said the America’s currency union is successful because Washington has over-riding legal powers over the 50 states.

“It is a precondition for the system to work but it doesn’t exist in Europe and the bond markets are starting to figure this out. We are looking at a noble experiment on the brink of failure,” said Ms Zemek.