Testing Times For The Euro


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Over the last three years, the currency story for British expatriates has all been about the Pound Sterling and its fall from grace – it lost around a third of its value against the Euro and a fif

Over the last three years, the currency story for British expatriates has all been about the Pound Sterling and its fall from grace – it lost around a third of its value against the Euro and a fifth against the US Dollar.

This year, however, the focus is shifting from Sterling to the Euro, with the outlook now also looking very challenging for the Euro. Weeks of uncertainty over Greece?s financial viability, not to mention concerns over the Spanish, Portuguese, Irish and even Italian economies, have plagued the single currency. Some analysts have even queried whether it can survive.

The problems of sharing a single currency across countries with divergent political priorities and economies has been brought sharply into the spotlight, as have the difficulties of getting 16 Eurozone States to agree on a solution.

Greece?s precarious financial position, combined with uncertainty surrounding any rescue plans, caused the Euro to weaken sharply.

At the end of March Eurozone leaders reached an agreement, with the International Monetary Fund (IMF) agreeing to fund around one-third of a ?22 billion rescue package for Greece. The fund would only be utilised if Greece faces default and is unable to raise money from the capital markets.

The agreement was welcomed and the Euro briefly rose against the Dollar and Sterling. However the sketchy details of the rescue fund could not sustain the gains and Eurozone finance ministers were forced to take further steps to support Greece and prop up the Euro. On 11th April they announced a ?30 billion loans package, at a lower interest rate than that currently offered to Greece. The IMF is expected to offer a further ?15 billion if needed.

Jean-Claude Juncker, head of the Eurozone group of finance ministers, said: ?This is the step of clarification that markets are waiting for ? it shows there is money behind this.?

The loans are available should Greece need them. It has not yet asked for financial help and will first continue with its austerity measures and commercial borrowing to tide it over the crisis. The fact that the loan package exists should help Greece access debt markets at reasonable rates, improving Greece?s position.

Payments would only be made if all 16 Eurozone countries agree ? and countries could potentially veto it. The situation in countries like Spain and Portugal is also yet to play out ? could Greece be the tip of the iceberg?

The Euro surged to a one-month high as a result, but we have yet to see if this can be maintained. With 16 different nations involved, there are both political and legal restraints to fixing the Euro. Economists warn that the Eurozone still looks divided and little has been done to address the longer-term underlying problems it is facing.

There is also the question of whether IMF involvement could damage the Euro?s reputation, as it could be viewed as a currency that needed international help to survive.

Most British expatriates holding Sterling assets and living in the Eurozone would be pleased to see a stronger Sterling and/or a weaker Euro. The lowest currency risk option for an individual is to match assets (bank deposits, investments etc) and liabilities (day-to-day expenditure) in the same currency. However, for many British expatriates there is a tendency to retain a significant amount of assets in Sterling, often including private pension arrangements (of course, the UK State pension is payable in Sterling) and, as a consequence many expatriates living in the Eurozone are subject to the vagaries of currency exchange rate movements.

For those selling property in the Eurozone and returning to the UK, the currency exchange rates have been very favourable, but for the majority of expatriates who still live here, the rates have made life considerably more costly, especially when added to higher rates of inflation.

It is impossible to predict future currency movements with any certainty. However, in my opinion there is a strong possibility that the Euro will weaken further in the short to medium term while the Eurozone problems exist. I do not subscribe to the worst case scenario of the Euro failing or of even one Member State reverting to their original currency.

As a UBS Bank article reporting on research by its economists says, ?Perhaps it would have been better for a number of countries if they had never joined the Euro. Nevertheless, the European Monetary Union is certainly not about to break up; at this stage, the costs would far exceed the benefits.?

Nonetheless, uncertainty about the fate of the Euro may be around for a while to come. In view of this, what can you do to protect your assets? Swapping all your Euros to Sterling or another currency is not the answer, because for a start you should still have enough assets in Euros to meet your spending liabilities for a few years, and there is no guarantee that Sterling or the US Dollar won?t end up falling more than the Euro. What you need to aim for, as much as possible, is diversification and flexibility.

When it comes to your savings and investments, you could diversify them over two or three currencies. Much depends on your individual circumstances, including whether you are likely to live in the Eurozone for the rest of your life, if there is any possibility that you will return to the UK and if you expect to leave an inheritance to heirs in the UK.

If you invest within an insurance bond (assurance vie in France) choose one which allows currency flexibility, so you can switch currencies if the need arises. If you are waiting to invest, you could invest now in Sterling and if or when the exchange rate improves, switch some to Euros then.

The same goes for your UK private pension funds. If you were to, for example, transfer them into a QROPS (Qualifying Recognised Overseas Pension Scheme), this allows you to choose the currency for the underlying funds and the income. You can usually set it up in Sterling and switch to Euros later, or, if it is in Euros, have the option to convert to Sterling at a later date if your circumstances (or the fate of the Euro) change. However you should keep in mind the fact that, exchange rate movements may affect the value of your funds.

There are testing times ahead for the Euro. What happens to it is out of your control, but you can usually control your choice of savings, investment and pension structures so as to give yourself currency diversification and flexibility. Ask an experienced international wealth manager like Blevins Franks for advice.

By Bill Blevins, Managing Director, Blevins Franks

13th April 2010

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