Words: Ashley Rigg
Published: 6th September 2011
*Taxi driver signals end of the Euro
When I visited Ireland in 2007, every other taxi driver mentioned overseas property. We all know what happened next.
On Saturday night I got talking to cabbie whose sister is married a Swiss man. He complained about being charged £8 a pint but more interestingly told of many of the shops refusing to take Euros on his last visit in August. The currency was devaluing so fast against the Swiss Franc that a number of small businesses would rather turn down business than hold a debasing currency.
Say what you like about the Swiss but they know a lot about finance (and cuckoo clocks).
One anecdote does not signal the end of the single currency project but it’s not the only surprising story that I’ve heard in the last few weeks.
On Friday, one of my clients told me two large European banks had offered to slash the mortgage rates on the developments he is managing. A freak admin error? Aparently not. The developments concerned are in Istanbul and the banks seem to be falling over themselves to increase their exposure to non-Euro denominated assets.
Europe’s banks are insolvent
These stories are to an extent a manifestation of a fact that seems to get very little mainstream media attention: Most of Europe’s banks are insolvent.
Former chief economist at the IMF Simon Johnson argued the case convincingly in an article for Bloomberg last week.
Technically, according to banking regulations (Basel II), sovereign debt (government bonds) has a zero risk rating which means that banks have to hold no capital against the risk of loss. Banks are allowed to value bonds at the price paid if they hold them to maturity and the borrower is not in default.
If banks valued the bonds at market prices, many of Europe’s largest banks would be bust. They do not hold enough equity (liquid assets) to cover the losses.
The only solution is to recapatialise the banks. The new head of the IMF Christine Largarde embarrassed the Jean-Claude Trichet, the head of the European Central Bank by calling for this to happen at a public conference last month. She is the most senior figure to publicly recognise the problem that Europe’s banks and politicians are happy to ignore.
The issues could be solved by co-indinated action (Asian governments could help recapitalise the banks for example) but the situation is likely to go critical before the politicians are ready with a solution. It could happen when the German courts rule on whether bailouts are illegal under the German constitution.
The euro (in it’s current form) is unlikely to survive the ravages of a panicking market.
It will mean short term pain but the longer term outlook for the overseas property market should be positive as cheaper currencies in Southern Europe mean higher tourism and demand for second homes from buyers in the North.
Further reading
Life without the Euro
Source: Global edge
User Comments
I think your summation of the effects of the Euro collapsing are very much skewed toward a positive outcome - tempered with some short term pain. In reality, if the Euro disappears it will not be an orderly collapse. It will be chaotic. And will cause a run on the banks - possibly worldwide. But certainly in Europe and the UK. This will lead without doubt, to a depression far worse than ever experienced. Yes, prices for overseas property will fall. But that fall will be a result of massive asset deflation. And even though prices will be cheap comparative to today's prices - few people will have the financial resources to take advantage. The overseas property industry will sink within weeks. In the UK, the ordinary Brit may offer their own opinions about the EU and the Euro and may even welcome the idea the Euro is disbanded. But few - if any - realise how their lives will change beyond recognition. And how the hardships that will befall them will last one, or even two generations. The situation is critical right now. What is needed is political acknowledgement that the EU must work toward both fiscal and monetary union. Because the EU cannot survive in it's current form. However, politicians are loathed to acknowledge this because of voter backlash. And at the end of the day, the EU leaders - and the leaders in the UK, put political ambitions ahead of financial stability.
So perhaps instead of hoping for the EURO demise - because it will lower prices for overseas property - we fear it instead. And pray someone in the EU asserts common sense and leadership. Of course... I could be wrong. And everything will turn out fine if the Euro collapses. But I wouldn't bet my house on that. Would you?
Adam Fletcher,
Prime Assets
Switzerland is the most undesireble country dealing with money from other countries and all western
countries should withdraw their money from swiss
banks, they will learn a hard financial lesson
H. Garcia,
Spain