14 July 2011

The Euro Future

We are all now experts on global finances! Perhaps not ... but we are at least aware that there are problems with some countries in the Euro zone. Ireland was "bailed out" not long ago, Greece was before that and is in the spotlight once again. Portugal, Spain and Italy are all wobbly as well it seems.

I do find it amazing (as a non-global finance expert) that anyone ever thought the Euro could work. What it has done is to remove the single major control that every country has on its economy - the value of its currency. It's like taking the gear lever out of your car!

That's all very well if the economies of all countries in the Euro zone are roughly in line. But Germany is light years away from Greece, for example, in terms of productivity, exports, tax receipts, etc..

The main country-specific indicator which remains is the interest rate available on its bonds (the equivalent of "Gilts" in the UK, or "Treasury Bonds" in the US). The riskier these are perceived to be the higher the interest rate they have to pay to encourage people to buy them. Irish bonds (2 year) are now over 16%, Portuguese are over 18%, and Greek bonds will pay you 29% !!

That means that the market is pretty much expecting a default - in other words, investors will get a good interest rate for a while, but may not get their capital back at the end.

Fortunately, that doesn't directly affect most UK individual investors. But there's no doubt that the ongoing uncertainty is one of the factors holding the stockmarket back - and that does affect most of us one way or another.

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