No guarantee of Sterling stability
For months now we have been banging the drum about the downside risks for Sterling, about how past performance is no guarantee of future performance and about how stability today does not mean stability tomorrow for French property buyers. When the Pound and the Euro walked hand in hand calmly through the sub-prime crisis and into the credit crunch there must have been some who took the warnings as just another cry of Wolf!
Currency exchange rates
Like Bob Monkhouse's apocryphal audience, they're not laughing now. Sterling was dumped unceremoniously out of the bottom of the trading range that had kept it between €1.46 and €1.50 for most of the last twelve months. From €1.48 the first three cents flashed by almost as though the Pound was being dragged down by a rock. |
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Liquidity problems at Northern Rock
Which, of course, it was. The liquidity problems at the Newcastle bank came about because it broke what used to be a cardinal rule of banking, it was lending long and borrowing short. For as long as they got away with it everyone was happy. The borrowers got their mortgages, the depositors got their interest, the shareholders got their dividends and the board got its bonuses. Until the music stopped.
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All because of sub-prime mortgages in the States
The situation arose as a direct consequence of the sub-prime mortgage structures in the States. As soon as lenders realised that anyone at all, themselves included, could be saddled with assets to which no sensible value could be attached, they protected themselves in the only way possible, they hung onto their cash. For Northern Rock this was bad news. To fund its book it had to borrow money on a regular basis for fixed terms, typically three months. When the supply dried up it went to the Bank of England for a sub.
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Sterling the worse for wear
Instead of being reassured by the Bank's provision of liquidity to Northern Rock, depositors were worried that it was involved at all. They only calmed down when the Chancellor announced that all deposits would be guaranteed. For the Bank of England, the Treasury, the London market and the Pound it was a lose-lose situation. There were so many fingers being pointed, it looked like a McLaren management meeting. The furore is subsiding now but it still leaves a bad taste in the mouth and Sterling is the worse for it, particularly because the end result is likely to be a base rate cut.
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Euro is benefiting
On the continent the European Central Bank is facing in the opposite direction. ECB President Jean-Claude Trichet and his team have been at pains to hint at higher Euro interest rates. Quite how they expect the Euro zone to escape the wider repercussions of the sub-prime-credit-crunch-Northern-Rock situation is not clear but they are talking the talk and investors are ready to believe it. The Euro is gaining the benefit not just of that hawkish central bank stance, but of being the principal viable alternative to a Dollar that nobody likes.
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Forward transactions advised for French property buyers
Although the Pound has recovered a little from its lows against the Euro, the prognosis is not brilliant with Euro yields pointing higher and Sterling rates likely to fall this year. The least that any potential French property investors should do is hedge their exposure by arranging a forward purchase of half the capital involved (Currency exchange options which save you money). Buying half of the Euros forward obviously does not guarantee a price for the whole amount but it does level the playing field and gets rid of the one-way bet of doing all or nothing.
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Sterling recovery will take time - French property buyers be aware
The sub-prime-credit-crunch-Northern-Rock-falling-Pound scenario might have run its course but Murphy's Law suggests otherwise. A Sterling recovery always takes longer than a Sterling collapse.
Additional articles which may be of interest:
Advantages of using a currency broker or foreign exchange specialist
Currency Exchange - Buying Euros at the Best Rates - Your FAQs
Glossary of terms used in currency exchange
Feedback on currency brokers or foreign exchange dealers
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About the author
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