Move out of sterling?

gozomark

the BoE didn't have an inflation target then, plus it wasn't independent

tradetime

PolishBigSpender wrote: »

I agree that it is a 'punch up waiting to happen' - but you should look at the history of why the Euro exists in the first place. In 1990, as a condition of agreeing to German unification, France managed to secure agreement on economic and monetary union. This is what led to Maastricht - essentially, French fears about German power were quelled by the reality that a united Germany would lose the Deutschmark. Without this agreement, it is unlikely that France would have signed the 2+4 Treaty - thus, no German unification.

Hence, it will be both in Germany and France's favour to support the Euro. With their backing, the currency is stable enough - particularly as there's also now becoming more and more reason for the Euro to survive and prosper. For instance, the fact that is the de facto currency in more than just the 15 Eurozone states says a considerable amount.

As resentful as many Italians are towards the Euro - they're not going to want to go back to the days of chaos under the Lira. Likewise, the new members (Malta/Cyprus/Slovenia/Slovakia) are doing fine.

If, and it's a big if - they do not bail out countries in need, then I suspect we will see some countries falling out of the formal Euro system. I suspect (for instance) - you would see Ireland and Portugal move to setting their own interest rates, while continuing to use the Euro as their currency.

Well written response, will be interesting to watch going forwards, I personally believe it will come under increasing pressure in the near to medium term as this crisis continues to develop it would not be where I'd put my money until we have some signs of "normal programing has been resumed"

Short_Seller

When the European banks sitting on at least £16 trillion of toxic assets, the euro has real structural problems...

Shame the Telegraph edited its figures as the £16 trllion is a conservative figure....
Orginal Telegraph report..

By Bruno Waterfield in Brussels
Last Updated: 1:51PM GMT 11 Feb 2009

http://www.telegraph.co.uk/finance/f...ent-warns.html

A secret 17-page paper discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday, also warned that government attempts to buy up or underwrite such assets could plunge the European Union into a deeper crisis.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned. “

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”

European Commission officials have estimated that “impaired assets” may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the ‘trading book’ total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.

In addition, so-called 'available for sale instruments' worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.

Banks account for their assets in different ways. Assets put into the “trading book” have to be marked to current market values, while those in the “banking book” are loans and other assets which the institution believes it can hold to maturity. Other assets are classified as “available for sale”, which are also marked to market values.

The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.

In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.

“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned.

tradetime

Reaper wrote: »

They might but that would make things worse. The Euro is already hampered by countries not keeping their deficits within agreed limits and if countries with a joint currency go further their own way on economic policy it is a recipe for chaos.

In the past I have been close to considering Euro membership a good thing but have been put of by the lack of disipline and controls on individual countries. At the moment that seems to be about to get worse so I'm glad we are not in it, but I have to say if the Euro survives this crisis it will have proved itself as a world currency anbd will emerge much stronger. However that is a huge "if", it could just as easily collapse if things get much worse.

Personally I have always been, and remain, of the view that there are too many old wounds for a European currency to survive the test of time, as the pressure builds, sooner or later those wounds will open.
Always makes me think of...
http://www.youtube.com/watch?v=HWCK0hCxGjI&feature=related

nrsql

I'll agree that the Euro shouldn't be considered safe - I think it probably has a better outlook than sterling but not buy much. I think they're both very high risk at the moment.
When I mentioned diversification I meant a lot wider. Have exposure to more far flung currencies not just sterling and euro. You might think the US is further along the cycle and might recover sooner - or might have more bigger problems to come. There are other parts of the world too.

As to high inflation being good for savers?
It depends on how well the BOE rate tracks inflation (and how that's measured) and how well that is passed on in rates.
If the rate goes up quickly then a slight delay in passing on the rate or time taking in moving funds to a better rate will quickly erode savings. I would say it will be very difficult to keep up with inflation.

gozomark

not if you save via inflation linked products

nrsql

gozomark wrote: »

not if you save via inflation linked products

Yep - I was talking about savings rates. Inflation linked produts will hopefully just depend on the security provider and how inflation is measured (and when).

JoeCrystal

@Gozomark, Indeed, I am starting to save part of my spare income with Index-linked Savings Certificates every month, hopefully to take into account of rise and fall of the RPI. With the rate so bad, I felt that a part of my income might as well go into Certificates, which at least is tax free.

At least that is an impression I got from reading the T&C. You can buy several Certificates within the same issue I think.

tradetime

Yes they are tax free, and you can invest up to £15k per person into each issue

nrsql

Up to £15,000 per issue - the 3yr and 5 yr are different issues.
You can take it out including monthly index changes after the 1st year.
Each year the value of the certificate is fixed and won't fall below that (+ % above index).