How to survive the Euro crisis
THE CRISIS DECODED
Even though we are not in the euro itself, UK banks have lent to European banks and we are as financially linked to the region as any other Western country. Banks know they are ‘exposed’ to European debt and face potentially big problems if one or more of the countries defaults on their loans.
Consequently, banks have become less willing to lend. Mortgage lenders, for example, have increased their fixed mortgage rates, have pulled most of their Standard Variable Rate deals and generally increased the size of deposits they are looking for from buyers. Robert Sinclair, director of the Association of Mortgage Intermediaries (AMI) says there’s ‘little sign of energy returning to the bottom of the market, with few mortgage options available’. The AMI thinks there won’t be an improvement until at least 2015.
Greece is at the heart of the problem as it struggles to repay its national debt. The Greek economy is actually relatively small, but if it did drop out of the euro then it’s highly likely that the larger (and much more indebted) economies of Spain and Italy would follow. Portugal and Ireland could well do the same.
Ahead of their exits – as we are already seeing in Greece and Spain – there would be runs on the banks in each economy as consumer and corporate depositors and foreign institutional lenders try to protect their money from any risk of conversion to new drachmas, escudos, punts, pesetas or lire.
If confidence collapses in a big way, the ‘contagion’ could spread around the world. European property prices have already been hard hit in some areas popular with British buyers. It’s likely that as much as €170 billion (£138 billion) in property debt in southern Europe (particularly Spain) won’t now be paid because hundreds of ex-pats have simply given up on their homes.
Many of the 400,000 British people living in Spain have been left in financial uncertainty following the banking crisis there, and many are keen to get back to the UK. They have been hit by plunging property prices leaving some in negative equity. Many are also suffering because low interest rates here have reduced any income they were earning from their savings, and exchange rates are about 16 per cent lower than when many expats bought their homes.
WHAT NEXT?
The collapse of the eurozone would have negative ramifications for the UK, as well as the rest of the world. Still, periods of economic turbulence can offer opportunities for anyone with money to spend.
Certainly, property prices are dropping like a stone in the southern European states, particularly Greece and Spain. In Spain, average property prices have plunged by 27 per cent since 2007, and on the Mediterranean coast, home to thousands of Britons, by as much as 70 per cent. If you are looking to buy, it’s worth keeping a close eye on the market.
Greek property developers are certainly having to be far more flexible when negotiating prices. Some are even offering incentives to buy such as paying utility bills for a certain period. Until now, potential buyers have been put off by the high cost of living in Greece and Spa
in, thanks to the strength of the euro, so if they dropped out then living costs would go down making them both more attractive.
But this is still a high risk market. It will be almost impossible to get a mortgage, and it is essential that you do detailed research before committing to anything.
If you’re just looking for a holiday, there are also some good bargain breaks available on the Continent. It is pretty expensive once you’re out there, however, so all-inclusive deals are best for the moment.
However, if you book now, as contracts are negotiated in euros, there could be complications if Greece left the euro between you arranging your holiday and actually going. It’s best to arrange holidays through registered tour operators who should protect against such eventualities.
Regarding holiday money, The Post Office says there’s been a surge of people buying euros – sales up 111 per cent over last year. However, there’s also a lot of movement in the other direction with people ‘panic-selling’ euros due to the uncertainty.
Moneycorp has seen the number of people changing euros to sterling double in the past month. Another currency broker, HiFX, has changed £150 million from euros to sterling in just 30 days.
Caxton FX advises hanging on for a while yet because the single currency is likely to continue getting weaker as the turbulence continues. You should be able to get more money for your pounds than you can right now.
A prepaid card is a good option as you can load currency on to it gradually while you keep an eye on exchange rates.
How to protect yourself
If you have money to invest, consider gold. The more economic turmoil there is, the more investors turn to gold and the price goes up. You can buy it in bars or sovereigns or put money into an exchange-traded fund that tracks the gold market.
London, New York and Hong Kong property tends to act like gold, too. While property around the UK is flat or even going down, central London property is still attractive and becomes more so as economic conditions worsen.
Fine art and collectables are also becoming more popular, particularly with the super-rich. Many antiques are rising in price and are seen as a viable, tangible investment that can be trusted when markets look shaky.
No one knows what will happen to the markets or to economies generally so the best thing is to hedge your bets and put your money into different companies and different types of ‘asset classes’ (eg pensions, shares, cash, bonds). Make sure you have no more than £85,000 in any one banking institution as that is the Financial Services Compensation Scheme payback limit if any of those institutions fails.