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THE EUROZONE CRISIS
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The euro crisis has severely dented the confidence of markets in Europe and of investors both inside the region and outside. 020 7490 1382 Andrew@thepublishinggroup.co.investmentinternational. drawings. the future of the euro and what the experts advise in terms of various investment options. Although Greece has put in place a positive start in terms of putting her economy back on the road to recovery questions are still being asked as to whether the €750 billion rescue package is enough. how it happened and what options investors face in the coming months and years. No responsibility can be taken for contributions lost or damaged in the post. ‘I 5 7 In this guide we aim to explain what the euro crisis is. gives a blow by blow account of the meeting that saved the euro What does the future hold? Michael Sneyd. Many point out that the full brunt of austerity packages have not yet been realised and in many countries the threat of national strikes will undoubtedly add to market volatility. Portugal and Ireland. so concluded the first quarterly review of the Greek government’s economic programme by the European Commission.uk Managing Director Ramesh Sharma. concerns still remain about the state of the economies in Spain. From Sydney to Hong Kong. head of sales at Barclays Wealth International and Barclays Wealth Intermediaries.uk Publisher Marco Callegari.co. take legal advice before entering into any transactions. the European Central Bank and the International Monetary Fund.uk ADVICETOREADERS Information carried in Investment International is checked for accuracy. currency economist at Barclays Wealth International. but for the future of the single European currency. photographs etc published in Investment International anywhere in the world.uk Head of Production Melanie Jones. While a rescue package has been put in place for Greece. 0207 490 0588 Ramesh@thepublishinggroup. Investment INTERNATIONAL The eurozone crisis www. editor of Investment International.co. investors have been affected by what has happened and according to analysts and commentators are likely to continue to be affected for at least another two years. Reproduction or imitations of these are expressly forbidden without permission of the publishers. avoiding risk. literary or pictorial matter whatsoever. 8 Editor Ray Clancy. looks at the trouble in euroland that led to the current crisis Turbulent times Mark Richards.co. 0207 490 0588 Marco@thepublishinggroup. All advertising is subject to the terms of our current rate card.com . In times of such unknowns it is not surprising that investors are being prudent.2 | Editor’s comment The challenges facing the euro The euro crisis has severely dented the confidence of markets but what is it and what options do investors have? Contents 2 3 Editor’s comment Saving the day – and the euro Ray Clancy. gives an overview of what has been happening and what might be expected in the next few years from the point of view of investments The expert’s view A Barclays Wealth International expert guide to the impact of potential volatility in the eurozone on investments 4 mportant challenges and risks remain’.uk Editorial Director Nia Williams. hired out or otherwise disposed of in a mutilated condition or in any unauthorised cover by way of trade or affixed to any advertising. but we recommend that you make enquiries and. if necessary. All rights reserved in respect of allarticles.co. not just in terms of Greece. examines the future of the euro Weathering the storm Ray Clancy.co. editor of Investment International. Conditions of sale and supply: this periodical is sold subject to the following conditions. Editorial contributions requiring an answer should be accompanied by a stamped selfaddressed envelope. 020 8290 4999 firstname.lastname@example.org Subscriptions Andrew Goldsmith. In it you can read about the behind the scene negotiations in Brussels. 0207 490 0588 Nia@thepublishinggroup. 0207 490 0588 ray@thepublishinggroup. resold. namely that it shall not without the prior written consent of the publishers be lent. and looking for options that create a diverse portfolio in order to spread any risks. Any views or opinions expressed in this magazine are solely those of the author and do not necessarily represent those of The Publishing Group Ltd.
summed up the moment in a single word: ‘Hallelujah’. editor of Investment International. floated the idea of a temporary Special Purpose Vehicle (SPV). retired to a private office to call Prime Minister Jose Luis Rodriguez Zapatero to discuss new austerity measures. Spanish Economy Minister Elena Salgado. Some huddled with aides. ‘We need a clear. however one big problem: the ministers could not agree on what to do. He pointed out that an SPV could raise and disburse funds as needed but might also get around Germany’s objections. It respected the unanimity rule. With German backing assured. unequivocal financial back stop. wanted to allow the European Commission. Europe’s economic heavyweight.’ he said as calmly as he could. France’s straight talking economy minister. strong. Thirteen of the 16 eurozone countries. It was the start of a weekend of frenetic activity to try to save the eurozone from financial meltdown. By the early hours of the Monday morning there was a lot of despair. Unacceptable So when he arrived he told the ministers that anything more than coordinated bilateral loans from member states was unacceptable and would be shot down as illegal by Germany’s Constitutional Court. An hour before the opening bell in Tokyo. took his place with instructions to hold the line on the loans idea. the meeting’s chair. Berlin liked the idea because it could be temporary and the Germans insisted on a three year limit. to ratify the accord. With investors in Asia poised to start selling again in just a few hours. Crisis This highly charged weekend marked the start of what has become known as the eurozone crisis. the ministers knew they needed to come up with a plan fast. www. But Germany. Interior Minister Thomas de Maiziere. when US Treasury Secretary Tim Geithner sat down in his office to make emergency telephone conference calls to G7 finance ministers and central bankers. Finance Minister Wolfgang Schaeuble had fallen ill on arrival in Brussels and been rushed to hospital. an SPV would be an acceptable solution and there was a huge collective sigh of relief. huddled in the Chancellery with a small group of senior cabinet members who were still digesting a major setback for the ruling coalition in a crucial state election hours earlier. backed by a eurozone guarantee. to raise money on capital markets and then lend it to member states in acute financial distress. We had our eyes on the clock because we absolutely had to have an agreement before the Asian markets opened.investmentinternational. Salgado reconvened the ministers just before 2 a. No agreement would have meant disaster. a major sovereign debt crisis. 2010. kept control out of the hands of the Commission. hated the idea. including Bundesbank President Axel Solution Verwey was dispatched to test the idea on the German delegation. others paced the halls talking on their phones or tapping out messages on their Blackberries. There was. Weber. a lot like 2008. Christine Lagarde. A few German officials.m. European finance ministers rushed to Brussels to try to thrash out a rescue package to stabilise the common currency as it became clear that the €110 billion deal for debt-laden Greece was not sufficient to convince global markets that the euro could survive.’ said one diplomat. Maarten Verwey. and avoided anything that might look like an embryonic common European bond or a permanent debt management office for the eurozone. The much awaited reply was yes. director of foreign financial relations at the Dutch Finance Ministry.Saving the euro | 3 Saving the day and the euro Calming the markets after the extent of Greece’s debt was revealed proved difficult. Here Ray Clancy. including Austria and Finland. ‘The atmosphere was like the end of the world. the ministers took a short break. which relayed it to Merkel. It was then that a little known Dutch civil servant made the suggestion that saved the euro.com The eurozone crisis . had hinted at such a solution in other meetings that night. goes over the vital moments when a deal was secured I t was Friday May 7. a confidant of German chancellor Angela Merkel. traditional allies of Germany. The agreement adopted eight days earlier had not stabilised the currency and in fact the markets had knocked the euro 4% lower against the dollar and pushed bond spreads to new highs.
if Greece is unable to turn around in time. Fears spread to other high-deficit regions. Contagion effects across Europe would push other European currencies lower. triggering the European fiscal crisis that culminated in the spring of 2010. which can be a slow and painful process. The combined IMF/EU €750 billion package announced in May alleviates the solvency concerns for Greece. We would expect that wider market sentiment would be impacted as any knock to Europe’s recovery would hamper the wider global recovery. EMU will survive We judge that the most likely outcome is that the euro area muddles through and that the EMU will survive (in fact. Greece’s fiscal challenge will be made more difficult by the economy being pushed into a deep recession (we expect Greece to contract 4% this year and a further 2. but we expect the likelihood of a country doing so is low. and when other euro members are not willing to offer support.which it continues to appear expensive against. currency economist at Barclays Wealth. A member can resolve its competitive issues by leaving the EMU. especially against other European currencies – such as sterling and the Swedish krona .investmentinternational. we are not forecasting the euro to lose much value against the US dollar over the next few years. these countries will need to reduce wages and improve productivity. The IMF/EU support package should help to secure the EMU over the next three years. causing their competitiveness to deteriorate. Other high deficit countries will also need to put their house in order over this time. questioning whether a country may have to leave. it may be offered some more support by other members if it is on the right path. Fiscal issues stand at the centre of Europe’s problems as some countries face problems finding the resources to service their debts. This does not provide a solution to the fiscal problems. competitiveness is low. We do expect that the euro area’s sluggish growth will cause the euro to weaken over the next year or two. For the euro to survive in its current form. Future What does this mean for the future of the euro? Whether Greece can turn around over the next three years will be important for the EMU to remain in its current form. the euro area has a more severe problem: the competitiveness of some regions has diverged and is a threat to the EMU’s existence. both these fiscal and competitiveness problems need to be solved. but any concerns that a country may leave the euro would most likely trigger an increase in investors’ risks aversion and cause market volatility to rise. causing “risky” currencies such as commodity currencies and emerging market currencies to fall. a crisis in the currency union may take place. Spain. Even if Greece does not turn around in time. it may even grow. and even more so that euro-area countries cannot print money to inflate away their debts. The euro area’s competitiveness issues stem from some countries having joined the monetary union but letting their labour costs rise. However. such as Spain. The eurozone crisis www. and European policymakers are unwilling to provide more support at the end of the three years. But beyond these immediate solvency issues. Italy and Portugal for the next three years by ensuring that these regions will be able to fund their deficits and roll over maturing debt. yen and Swiss franc would be the best performers. examines the future of the euro for the short and long term S Solvency ince November 2009 increasing concerns that Greece would not be able to finance its government budget and roll over its debt have escalated. or even if the entire EMU could dissolve. to both the country itself and the rest of the euro area. Rather. We expect that the “safe haven” currencies . although the euro itself would likely be the greatest casualty. Outside of a currency union a country could allow its currency to depreciate to restore competitiveness. However.com . But there may be little choice in a situation where debt is unsustainable. Ireland and Portugal and investors became uncertain about the future of the European Monetary Union (EMU). Spain.5% next year) by the existing fiscal cuts. but does provide some time for these regions to dramatically cut their deficits and get their debt outlook under control. with Estonia set to adopt the euro next year). Greece and Portugal have all seen their competitiveness fall relative to Germany and France.4 | The future What does the future hold? With many European countries introducing austerity packages the real brunt of the euro crisis will be felt in the coming months and years. The cost of leaving the euro is high.the US dollar. Here Michael Sneyd. The US has its own fiscal problems which aren’t being addressed by policymakers and do not appear to have been fully considered by markets. Italy.
it seemed that markets had effectively mutualised the risk of eurozone debt by treating all government bonds as equal. would exclude weaker economies from joining the euro. Markets turned on the euro and began demanding higher interest rates to buy the debt of struggling southern European countries. Germany. Italy and Belgium were minuscule. The Maastricht treaty had set out the terms for the creation of the single currency and targets for countries to meet including limiting their debt and controlling inflation. ‘Important challenges and risks remain’. Ten years on at the end of 2009. Borrowing money seemed easy and cheap. interest rates were in reality too low for a country like Spain. Failing to meet the criteria. Questions are being asked as to whether the €750 billion rescue package is enough. had successfully pushed for a loosening of the rules after it repeatedly breached them in the early 2000s. After years of barely distinguishing between the debt of different eurozone countries. The key question now. is whether the deep problems in the eurozone are fixable? As the IMF report pointed out. long a stickler for fiscal discipline. Low interest rates meant that countries like Greece. Countries outside the eurozone from Iceland to Ukraine www. Published at the beginning of August. It has now emerged that there was a lot of creative accounting going on. hiding deep problems in euroland. Spreads between German bunds and the debt of countries such as Greece. They didn’t stick to the Maastricht rules and no one was prepared to stop them. such was the rush to make the single currency work. but most of those within the zone were hailing the euro as an ‘anchor of stability’. it was thought. Europe’s common currency appeared to have weathered the worst global financial crisis since the Great Depression with barely a scratch. Figures were massaged so that countries could meet the criteria to join the euro. Europe’s debt was being fudged. investors could suddenly see the massive fiscal divergences within the bloc.Risk warning | 5 Weathering the storm With the warning that ‘important challenges and risks remain’. but for the future of the single European currency. 1999. And it wasn’t just countries like Greece. But it was like a mask. the European Central Bank and the International Monetary Fund declared there has been a strong start in terms of putting Greece on the road to economic recovery. when a newly elected Greek government shocked financial markets and its eurozone partners by announcing a huge upward revision of its budget deficit forecast. Suddenly Spain could spend its way out of the troubled country it has become post Franco and be up with the big boys on the European stage. Spain. For much of the 2000s. led by a vigorous implementation of the fiscal programme and reforms are on schedule. Greece. as fireworks lit up the skies of various European capital cities and everyone looked forward to a strong currency and the warnings of critics went largely unheeded. a joint statement declared that the end of June quantitative performance criteria was met. Ray Clancy takes a look at the trouble in euroland and examines how the euro crisis panned out T he first quarterly review of the Greek government’s economic programme by the European Commission. first Greece and then Portugal and Spain. even France and Germany have been accused of making themselves look good on paper when in reality they were not. Portugal and Ireland built up huge public debts but they just kept spending as borrowing was so cheap. What effectively happened was that money was transferred from rich northern European countries to struggling southern ones to help them pay their debts. even though the latter states had debt-to-GDP ratios of close to 100%. Greece has a lot to do – it Fireworks The euro came into being on January 01. had seen their economies collapse.investmentinternational. Signs of trouble The first clear sign of trouble came in October 2009. far above the 60% ceiling set out by the Maastricht Treaty. For example.com The eurozone crisis . Creative accounting But instead the rules were flouted left right and centre. It is only now that years of problems are becoming public and the underlying weakness of the system is being exposed. Portugal and Ireland could take on cheap debt and there was no central authority to keep an eye on things. But hidden in the statement was a warning. not just in terms of Greece.
the head of the EC.com . the Commission said. are still anecdotal. Spain and Portugal unless urgent action is taken to tackle the debt crisis. Although the EC has recently raised its 2010 economic growth forecasts for the EU and the 16 countries that use the euro. high debt levels and lingering tensions in sovereign debt markets’. fuelled largely by strong sales from Germany’s export sector. Public protests In France. including reducing tax evasion by high income and wealthy individuals. trade unions began warning in the middle of September that mass strikes are potentially on the cards. that a currency union cannot work without deeper political cooperation on a range of economic issues. Berlin and Paris have both pinned partial blame for Greece’s meltdown on the failure of the Commission to police the EU’s budget rules. Analysts expect that some time during the autumn some governments will wobble over their austerity programmes due to the threats of national strikes. He stunned the world when he recently outlined an apocalyptic vision in which crisis hit countries in southern Europe could fall victim to military coups or popular uprisings as interest rates soar and public services collapse because their governments run out of money. Role of the EC Another issue has to be addressed – the role of the European Commission. Berlin wants quicker and harsher sanctions for countries that fail to keep their deficits under control including denying them access to EU structural funding and suspending their right to vote on matters of bloc wide importance. But in France there is a belief that Germany has failed to grasp the real message of the eurozone crisis. On one hand Germany’s Chancellor Angela Merkel wants a radical strengthening of EU budget rules as well as changes to the Lisbon Treaty to prevent such profligacy from ever happening again. But growth during the second half is unlikely to repeat the second quarter’s performance. where public sector pay is to be slashed by 25%.investmentinternational. or of childcare being cut. Indeed. Barroso’s warning lays bare the concern at the highest level in Brussels that the economic crisis could lead to the collapse of not only the beleaguered euro. according to the commission. The eurozone crisis www.’ the EC said in its autumn forecast. EU finance ministers agreed in September to submit budget plans for early review by the EC and other EU governments as part of moves to strengthen fiscal discipline in the bloc. The EU’s unexpectedly strong growth in the second quarter. This is the most tangible result so far of work done by the ministers since May in an effort to toughen EU budget rules and prevent another sovereign debt crisis like the one triggered by Greece. It added that despite the partial recovery since the emergency bailout was agreed. which is not part of the single currency. with regular summits of the 16 national leaders and a dedicated secretariat to oversee the coordination of economic policy and address imbalances in competitiveness. The stark warning came as it emerged that EU chiefs have begun work on an emergency bailout package for Spain which is likely to run into hundreds of billions of pounds but which Spain denies it needs. starting in 2011. needs to tighten expenditure control and monitoring and further strengthen its tax administration. Behind the scenes there are real fears that democracy could ‘collapse’ in Greece. but the EU itself. not central bankers and finance ministers. She blames the crisis on a lack of fiscal discipline on Europe’s periphery .6 | Risk warning acknowledgement that Europe’s existing tools to prevent a breakup of the bloc are woefully inadequate. Spain and Portugal. But in many countries the public sector is set to shrink. Italy and Romania. will lift the region’s growth prospects for the entire year. But many of the austerity measures are yet to hit. warning of ‘lingering tensions’ in Ireland and elsewhere. along with a string of fragile democracies. Sarkozy would like to see an economic government for the currency area. The stories about medicines not being available on the state. even though a double dip recession is unlikely.that is countries like Greece. ‘The global recovery is still expected to be uneven and is surrounded by major uncertainties. A warning over this has already come from Jose Manuel Barroso. there is still a lot of concern. citing ‘the resurfacing of global imbalances. It is early days. saying strong growth in industrial exports is driving a faster than expected recovery from the economic crisis. But years of not paying tax in Greece has made tax evasion a national past time and the challenge of change on this issue mirrors the need for change throughout the eurozone. setting himself in direct opposition to Merkel. trade unions have already organised strikes and massive street protests against unpopular reforms that raise the retirement age by two years to improve public finances and in the UK. Both the euro and the bloc remain vulnerable. the bailout of Greece is an Stunted growth But at the same time it said fears of a resurgent eurozone debt crisis are likely to stunt European economic growth prospects this year. or of teacher shortages. Confidence Analysts believe that winning back the confidence of the markets and investors largely depends on whether Berlin and Paris can agree on a way forward. On the other hand French President Nicolas Sarkozy believes it is up to politicians to take a lead. Other EU countries seeing public protests over austerity plans include Hungary. the future remains ‘tenuous’ and ‘adverse effects on bank credit provision to the economy cannot be ruled out’ and sovereign bond spreads in most European countries ‘are still significantly above the levels seen at the beginning of the year’.
Barclays Wealth International has witnessed significant shifts in client investment preferences. committee meeting reports give investors an insight into the latest thinking from a worldwide perspective and helps make them aware of new ideas and strategies. This has seen a demand for alternative income products. Ireland and Spain. especially for investors who are looking for an income from their investments. ‘There is a crisis of confidence and views on how to deal with that are polarised. Here Mark Richards.investmentinternational.’ said Richards.’ concludes Richards.a theme explored in Barclays Wealth Insights Volume 10: Investor Perceptions of Property. the downside of equities is that they need to be seen as a long term investment and your capital is at risk. clients have focused on two key areas: using investment products to supplant the lowered interest rates on traditional bank accounts and secondly a pronounced switch in preference to products that promise to repay some or all of the original capital upon maturity provided certain conditions are met. one of reassurance. considers what has been happening and what investors might expect over the next few years. but Europe suffered its own crisis with high levels of debt in Greece resulting in a €750 billion rescue package and ongoing concerns about Portugal. looking at equities and secure government stocks. This is an important role for us too. ‘Communication is vital. Richards adds. that you should consider buying property as a long term investment as there are relatively high initial costs and the buying process can be reasonably lengthy. there has been a strong demand from expats who need a regular income from their portfolios. That has resulted in more demand for structured products over three to five years to see investors through the crisis. our monthly and quarterly global investment Diversification There is also a belief in security in stronger www. Although each investor's needs vary according to their individual circumstances. For example. ot only did investors have to readjust to the global economic downturn sparked by the collapse of Lehman Brothers on the back of the sub-prime mortgage crisis in the United States. Yes. Over the last two to three years. Perhaps the biggest impact of the eurozone crisis is that cash does not currently offer good returns. head of sales at Barclays Wealth International and Barclays Wealth Intermediaries. as with all investment. ‘We have also seen an increase in investors seeking a second opinion. It would seem that investors have an emotional attachment to property and view it as a tangible investment . however.’ he explains.Turbulent times | 7 Time for helping hands N The last two or three years have been turbulent ones for investors in the eurozone and this is Barclays Wealth International's view government bonds and that these should be part of a diversified investment portfolio in the coming months of ups and downs that are expected to dog the markets. they are seeking another opinion via their relationship manager even if that just reinforces what they had already intended to do.’ he adds. However. The company’s Knightsbridge-based office has been particularly busy as a result of the growth in demand for property investments. many investors have been seeking certainty of income returns and capital preservation. but it is one that needed in this very modern crisis. ‘The key is balance and diversity. It is not about short term wins and gains. Balance ‘Those that are concerned are taking a long term view. At the same time. The key trend for the coming months and years as the eurozone crisis hopefully settles down is one of diversification. typically between five to six year terms. Richards points out. The move to investors requesting rate-based products has obviously been driven by the reduced interest rates available on standard and term deposit accounts.’ Richards said. Where they might have acted on their own knowledge and instinct in the past. but about going steadily forward. This may not offer the highest possible return and it might be regarded as an old fashioned approach. Long term structured deposits and notes. have proved popular with investors seeking higher interest rates and Barclays Wealth International has been seeking to meet this demand. Property has continued in its position as a popular investment following the global downturn and the euro crisis. Barclays Wealth Intermediaries has seen a 60% increase in enquiries in certain areas of properties. ‘It is through this kind of contact and communication that we can restore confidence. concerns about Greece are likely to persist in the short term but a balanced portfolio can see the investors beyond this. Increasingly.com The eurozone crisis . you should ensure that these products offer the risk mix of risk and reward in line with attitude to risk. so to speak. however. Barclays Wealth International has a strong belief that there are opportunities in equities that are generally underpriced.’ he adds. Richards points out that London is popular with investors who see it as offering good prices at present. Confidence Overall the strategy at Barclays Wealth is to restore confidence among investors and to encourage them to see their portfolios over the long term.
However. a ‘muddle through’ scenario looks unlikely and consequently a ‘barbell’ fund strategy (combining high quality government bonds at one end of the barbell and equities at the other) could make a lot of sense. In this ‘bimodal’ world. ‘In between’ assets. the eurozone crisis has shown beyond all reasonable doubt that some assets that would normally be thought of as being relatively ‘safe’ – such as sovereign bonds – may not perform at times of major economic stress. therefore. One way to deal with this is to ensure that your portfolio isn’t just The eurozone crisis www. Conclusion: A ‘barbell’ fund strategy should make sense over the coming months.8 | Ask the expert The expert’s view With volatility in the eurozone likely to continue. However. given that the crisis has led to polarised views in markets. the crisis and the bimodal nature of investors’ expectations are likely to provide a challenging backdrop for investment funds and fund managers. diversification is key. the impact of the crisis on the funds industry is harder to discern. credit worthiness is improving. Over the longer term. However. reflecting the ‘polarised’ market expectations we discussed earlier. also appear supportive with strong levels of profitability and higher credit worthiness and liquidity than a year ago. question marks are likely to remain over the sustainability of debt levels in some EU states. however. austerity cuts in Europe in response to the crisis mean that Europe is unlikely to contribute much to global GDP growth over the next few years. as we have alluded to above. for although debt-rollover risk has collapsed following decisive IMF/EU intervention.com . on the face of it. what does the future hold for investors and investments within Europe? W the next few years. particularly if the euro area registers low levels of GDP growth over the next few years. such as corporate bonds. But. the risk is that fiscal tightening hits activity just at a time when the economy is somewhat fragile. Over the longer term. and liquidity levels remain high. of course. could struggle in this environment and consequently we no longer favour them in our own model portfolio. investors’ views are polarised with some expecting a deflationary ‘bust’ and others expecting a stock market ‘boom’. as market participants downgrade their economic forecasts. While a stock market ‘boom’ scenario could lead to positive returns and possibly quite high ones – especially given the recent decline in equity prices – more signs of the recovery faltering could result in further equity losses if investors begin to fear a deflationary bust. Conclusion: Euro-area GDP growth is likely to Bonds The crisis provided a major blow to peripheral European Union sovereign bond markets. fixed income markets have been reassured by the austerity pledges and fiscal consolidation plans announced in Europe and Japan. Stocks and shares Stock markets have made gains on recent months despite worries about the strength of the global recovery. experts from Barclays Wealth have given their expectations for various investments over focused on one particular market or asset class. more recently. Funds In the short term. assuming that the global recovery continues. still appear ‘cheap’ and fundamentals would. More generally.investmentinternational. also lifted the ‘fair value’ of equities in our equity valuation model. ith volatility likely to continue in the eurozone for some time. fundamentals remain supportive: corporate profits continue to grow. this means that stock markets are likely to remain volatile. In reality. As always in investment. Developments in Greece could underscore just such a message. A further expansion of the level of economic recovery has. Over the longer term. as now seems likely. How things turn out from here is highly uncertain however. a renewed weakening of the euro would mean that European firms with a euro cost base and revenues in other major currencies could be attractive. debt sustainability remains far from assured as a contracting economy bears the burden of an ambitious fiscal tightening programme. Equities may. Conclusion: Investors who are worried about sovereign debt risk should focus on the lowest-risk government bonds – such as US Treasuries or German Bunds. magnifying the social cost of the adjustment.
yen. interest rate and fiscal outlooks than the euro.00% throughout 2010 and by the end of 2011 we would not expect them to be any higher than 1. However. we expect official interest rates to remain on hold at 1. although protected or structured products can remove some or all of this risk.the dollar. and there is a risk that the Bank may even have to re-start its quantitative easing policy next year. In the US. doubts over fiscal sustainability are likely to act as a drag on the euro. a ‘double dip’ recession – by no means an impossibility at this stage – would mean that interest rates could remain low well into 2011 and perhaps beyond. Given the continuing uncertainties over EMU. there is some hope for savers: interest rates are at. Conclusion: Look for other ways to supplement income from savings accounts. in the UK. Looking further out. Further afield. The drawback of these of course is that you may get back less than you originally invested. Thus we expect sterling to recover mildly this year as its risk premium is reduced. This. or very near to. the decision of the coalition government to tighten fiscal policy aggressively is likely to keep the Bank of England on the sidelines until 2011. These currencies should be supported by more favourable growth. Meanwhile. it has also raised the spectre of a further economic downturn. as are worries that current EMU projections may have to be revised from its current form. in the UK. given that many developed world economies remain fragile. investors’ confidence in the fiscal outlook.75%. Japan is taking measures to reduce its huge levels of public debt and here we expect official rates to remain at 0. in turn. Conclusion: Expect sterling and other cheap currencies – such as the Swedish krona – to strengthen against the euro over the next 12 months. Interest rates The euro area fiscal crisis has prompted governments in many parts of the world to introduce austerity measures. Exchange rates Relative interest rates and fiscal outlooks are likely to be the main drivers of currencies for the rest of the year. the euro is likely to remain under pressure against other European currencies such as the Swedish krona and Norwegian krone.have weaker interest rate and fiscal outlooks. we expect interest rates to end 2010 in their current 0 to 0. and their economies also have strong fiscal outlooks too.Ask the expert | 9 lag that of the US and Asia. mean that returns on ordinary savings accounts are likely to remain meagre over the next few years. euro and sterling . In the euro area. and those investors who are dependent on savings accounts for income will have to find ways to meet the shortfall – perhaps by investing in a high-quality bond fund or by building a portfolio of equities with high and secure dividend yields.com The eurozone crisis . the budget was initially positive for sterling as it boosted www. 0% in most of the major developed economies and rates should start to rise in the latter part of 2011 once it is clear that the global economy is firmly on a recovery track. Over the longer term. However. The upside to all the fiscal tightening is that many economies’ interest rates will be able to stay lower for longer. Meanwhile. risks to sterling’s recovery remain: UK growth could slow once spending cuts take place next year and might be further hurt by increasing inflation concerns after the VAT hike. Savings Fiscal austerity measures may have pleased the sovereign bond markets and credit rating agencies.25% range and we would not expect the Federal Reserve to start raising rates until 2011. A few of the peripheral G10 central banks have started raising interest rates.10% for the foreseeable future. and its valuation stays cheap. monetary policy is extremely accommodative and is likely to stay so for some time. Meanwhile the four major currencies . providing a headwind for euro area equities. Indeed. While this has placated bond markets. Conclusion: Expect interest rates to stay lower for longer in developed nations as austerity measures reduce the need for central banks to act.investmentinternational. substantial short positions are unwound. but lingering worries that fiscal tightening could tip fragile economies back into recession mean that interest rates are likely to remain very low for the foreseeable future.
When we recommend investments we keep just one person in mind. Barclays Bank PLC. Item Ref: PP1163. Barclays Wealth is the wealth management division of Barclays and operates through Barclays Bank PLC and its subsidiaries. Registered in England.barclayswealth. you Get more out of your money with Barclays Wealth International investments • The UK’s number one wealth manager* • Investment advice specially tailored to suit your needs • Bear in mind the value of your investments can fall as well as rise and your capital is at risk Let’s talk today +44 (0)1624 684 316 † www. London E14 5HP. † Lines are open 7am to 8pm weekdays and 8am to 5pm weekends and UK bank holidays local time.com/eurozone * Barclays Wealth is the UK’s number one wealth manager by client assets as at 30 June 2010 (as ranked by Private Asset Managers). Please check with your local telecoms provider. Registered Number: 1026167. Barclays Bank PLC has its principal place of business in London. England. Registered Office: 1 Churchill Place. September 2010 . Authorised and regulated by the Financial Services Authority. Calls may be recorded for training and security purposes. Call charges may vary.
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