By Peter Lavelle
Welcome to our account of changes in the foreign exchange rate overnight, as well as our look ahead.
1. The pound has lost ground across the board overnight, as rumours of a €300bn bailout for Spain from the IMF hit confidence in Europe. IMF president Christine Lagarde has denied such talk, stating that a bailout for Spain is not even being discussed, yet this highlights the dire straits Europe’s fourth largest economy are in.
Why does Spain need a bailout?
Because its banks are highly indebted following a property crash in 2008. The total cost of the bad loans is thought to be more than the Spanish government can handle, giving rise to speculation it will need outside assistance to avoid going bankrupt. Indeed, this past week alone Madrid has had trouble raising just €10bn to refinance Bankia, one of its countless banks, highlighting the problem.
So why don’t they get the bailout already?
First, because the cost of being bailed out is to hand control of your national budget to the EU, which for the Spaniards is unacceptable. Second, because Spain is so big that to bail it out requires a huge commitment from the rest of the Eurozone, which is something countries like Germany are not sure about. In short, there’s a whole lot of pride and indecisiveness about.
How come all this has affected the pound?
Because the UK is geographically, politically, and financially tied to the Eurozone. If Europe suffers a grand crisis, the UK is more likely to be badly hit than, say, the US or Australia, because of its closeness. That encourages the markets to sell the pound, as the continental forecast deteriorates.
Is there anything else happening in Europe right now?
Yesterday, Ireland held its referendum as to whether it favours joining the Eurozone fiscal treaty or not. The vote isn’t important to Europe as such, because the treaty has been organised so that, even if one country rejects it, the rest can still press ahead. But for Ireland, it is crucial, because if it rejects the treaty it can’t gain access to EU bailout funds it needs to stay solvent (talk about blackmail, eh?) Furthermore, if Ireland says ‘No’ it sends a strong signal that austerity is being rejected inside the Eurozone. That could affect the rates.
2. One further reason the pound has lost ground is that, in the UK, British business group the British Chamber of Commerce has cut its 2012 growth forecast to just 0.1%, while calling on George Osborne to inject stimulus into the economy. This is a pretty damning indictment from a sector Osborne has attempted to court.
Why is the BCC saying this now?
Because 2 years on since the Coalition took power, the UK economy is exactly the same size as it was in 2010 i.e. it hasn’t grown in the least. This has shown Mr. Osborne policies to be ineffective at stimulating growth, even as he’s had some success at cutting debt. Perhaps the BCC has just lost patience.
Get in touch
I do hope this post has been useful. I will return with my next update tomorrow.
If you have any questions about the foreign exchange rate or transferring money abroad in the meantime, don’t hesitate to leave a reply in the box below. I’d be delighted to provide an in-depth personal answer to your enquiry, free of charge.