I was hoping to write about something other than the Euro this month, as no doubt you are as fed up of the subject as me, but events mean this is not to be.
At last it looks as if the politicians cannot dither any more. As any readers of Informing You over the last eight months will know, I have suspected the departure of Greece from the Euro was more than likely, and as this belief is gaining ground, inevitably, politicians are predicting this will result in Armageddon, not only for Greece but everyone within the region. This is no surprise, as they can hardly say otherwise given it was them that dreamt up this disastrous experiment.
I have for a long time felt the Euro was too good to be true. It suited the Germans as, compared to the Deutschmark, they finally had a currency that was weaker making their manufacturing more competitive globally. It suited the poorer countries as they were able to borrow far more than they had ever been able to before, and at rates they could only have dreamt about. However, like most things that appear to be too good to be true the Euro has turned out to be no exception.
The countries that borrowed now find that this money needs to be repaid, and the Germans, rather like a parent who finds their child has maxed out their credit cards, have to decide whether they help to pay these debts or let them go bankrupt. The difficulty in this case is that Greece, Spain and probably Italy will never be able to repay their debts. As the bulk of the holders of these countries' Bonds are European banks it is also inevitable that if they don't make the repayments many of these will have to be nationalised to protect depositors. Oh dear, what a mess!
I suspect that if Greece leaves the Euro other countries may think the short term pain of doing so worthwhile as they watch Greece default on its debts and have a currency trading at probably half of the previous Euro level. Certainly anyone in the UK considering a couple of weeks in the sun may think Ouzo at half the price of Rioja worth considering. So, what likelihood the Portuguese, Spanish, Irish and even Italians ditching the Euro? Maybe the strong rumours that the Irish are printing Punts once again have an element of truth. In my opinion the only way I cannot see others leave is if the ECB starts printing money, but this would take a major about turn from the Germans before it could happen.
When the UK joined the Exchange Rate Mechanism, in what was a prelude to the single currency, it was said that doing so was necessary to avoid us becoming the poor man of Europe. Our membership lasted less than two years and ended with the farce of interest rates, on our last day of membership, rising by what seemed the hour with the base rate increasing from 10% to 12% throughout the day. When the Chancellor Norman Lamont announced that we would be leaving the ERM the day became known as Black Wednesday and the pound immediately fell by 25% on the global exchanges.
What happened afterwards wasn't quite what those predicting dire consequences expected. In fact it was the start of 15 years of unbroken growth. At a stroke UK manufacturing became more competitive and the government was not forced to keep interest rates at an artificially high level to prop up the currency. In fact four months after leaving the ERM the base rate had fallen to 6%, half the level of Black Wednesday. The effect on the FTSE 100 index was also marked, with a rise of 4% the next day and a total rise of 15% within six weeks. Of course our currency was unable to buy as much when abroad, and importers especially felt the pain, but in terms of the good it did for the economy the evidence is clear.
Now I am not suggesting the exact same thing will happen if Greece leaves, but I do believe it is more than likely we will see a strong rally in the markets once the inevitable finally happens. As we keep on repeating in Informing You and Letter from Linlithgow, the rest of the World is continuing to grow, and our transatlantic cousins find themselves sitting on the Worlds cheapest natural gas reserves which will have a huge impact on their economic future which, hopefully, I will be able to go into greater detail in future Informing You emails.
For those already invested the World is not going to end, so sit back and watch it all pan out, and for those with cash to invest, dripping this in over the coming months as the carnage unfolds could prove extremely profitable.
For and on behalf of Alan Steel Asset Management
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