European Sovereign Debt Crisis

The European sovereign debt crisis continues to pose a significant threat to the recovery of the Euro-zone and to the wider global economy. The €109bn bail-out agreed in July for Greece may have averted an immediate significant Greek default and contagion spreading to Ireland, Italy, Portugal, and Spain but the Euro-zone continues to face significant challenges. In fact, despite Greece’s significant austerity measures, figures released by the Greek government over the weekend project that the 2011 deficit will be at 8.5% of GDP, well short of the 7.6% target agreed to secure the first bailout. Greece needs to secure the next tranche from the bailout fund of €8bn or it will run out of cash this month. Therefore for the time being Greece will remain firmly in the spotlight.

The ongoing uncertainty over the economic recovery in the UK and Euro-zone has caused some uncertainty in the outlook in the Pound -Euro (GBPEUR) exchange rate. So far the Euro has shown a surprising amount of resilience to the European sovereign debt crisis. Against the Pound the Euro appreciated to a EURGBP high of 0.9083 (GBPEUR 1.1010) at the start of July before falling back to 0.8705 (GBPEUR 1.1488) in the middle of July and settling around 0.8750 (GBPEUR 1.1429) in early August. Throughout September the EURGBP exchange rate traded between 0.8527 (GBPEUR 1.1727) and 0.8795 (GBPEUR 1.1370). The threat of further Quantitative Easing from the Bank of England temporarily weighing on Sterling before Greece once again took the spotlight. Today 3rd October the rate trades in the region of 0.8585 (GBPEUR 1.1645).

In Europe despite the debt crisis, the European Central Bank has increased interest rates to 1.50% compared to the Bank of England’s 0.50%. The full 1% interest rate differential advantage the Euro holds compared to Sterling, coupled with the threat of further Quantitative Easing from the Bank of England has so far prevented the Pound from appreciating significantly against the Euro. Currently we are hopeful that the Pound will eventually make some further progress against the Euro towards 1.18-1.20. However, the fragility of the UK economic recovery and the threat of further Quantitative Easing does pose a threat to this view. We expect to continue to see increased levels of volatility in the foreign exchange markets.

Please do not hesitate to contact Currency Matters on telephone 01695 581 669 to discuss how you can save money and eliminate risk when conducting your foreign currency exchange.