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Euro to end as Greece exit nears?

Speculation that the euro might soon run its course hit the headlines this week, as Greece could soon exit the common currency, and Spain banks sink deeper into the mire.


Here is my latest update of the British pound to euro exchange rate, covering the 11th to 18th May 2012. This is intended as a brief guide to what’s affected the exchange rate this past week as well as what might happen next, to help you decide if now’s the best time to change currencies.

Pound to euro:

-0.72% decrease on the week (from 1.254 to 1.245)
+2.33% increase on the month (from 1.217 to 1.245)

This past week:

1. Right-wing UK newspapers including The Telegraph and Daily Express have been openly discussing this week the possibility that the euro might soon end, as economists put the odds of Greece leaving the euro at 50.0% and above.

2. The pound has lost a cent against the euro, as the UK exposure to the eurozone prompted the markets to flee to the US as a safe(r) haven. This potential UK vulnerability was highlighted by the fact that UK Santander was included in a downgrade of 16 Spanish banks by Moody’s.

3. In addition to the widespread downgrading of its banks, Spain’s borrowing costs flew above an unsustainable 6.0% this week, as markets reacted to the trouble in Greece by upping the cost of lending. This could soon force Spain to request an EU bailout, which would push the eurozone rescue fund to its limits.

4. Furthermore, Madrid announced that it is in official recession again this week, as GDP contracted –0.3% in Q1. This is Spain’s second recession since 2009.

5. Last but not least, the Spanish government has begun an audit of its banks to reassure the markets, hiring Goldman Sachs to manage the process. However, given that this audit is set to take two months, Spain may not have time to complete it before the crisis reaches danger point.

In focus: Euro at death’s door as Greece exit nears?

The possibility that the common currency might soon cease to exist became a more distinct possibility this week, as economists put the odds of Greece leaving the euro at 50.0% and above. This sent the euro to a 4-month low against the USD, yet the pound did not gain, given the UK’s proximity the eurozone.

The reason Greece might topple the euro is its indebtedness. It owes something in the region of €450bn to European governments at present, which combined with the losses it would endure following the collapse of its banks, could prompt a domino effect across the continent. Of course, this remains a remote possibility, yet it seems real enough that this week the markets priced it in. So long as Greece remains in limbo, the euro (and perhaps the pound) will hence remain under pressure.

Next week:

The G8 meets this weekend, doubtless to discuss the crisis in Europe. Yet whether concrete plans to solve the crisis will emerge is unlikely. Instead, it’s likely that both Greece and Spain will remain in limbo, until Greece holds its second general election in June.

I will of course return with my next update next week.

If you have any questions about changing currencies or transferring money abroad in the meantime, don’t hesitate to leave a reply in the box below. I’d be delighted to provide an in-depth personal answer to your enquiry, free of charge.

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Peter Lavelle is an economist at foreign exchange broker Pure FX. For a free no-obligation quote regarding changing currencies, get in touch at foreign exchange specialist Pure FX.

Copyright: Peter Lavelle, Pure FX
Category: Expats, Spain News
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