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Every German's second property

03 Apr 2012 | Torrie Callander, Global Reach Partners

FD's Extraordinary Items blog

ONCE AGAIN, there are rumblings of change in European politics. The repercussions of which could directly impact the single currency, and importers and exporters in the UK.

As I boarded the Underground the other week I saw a billboard for a well know current affairs magazine that bore the slogan "Every German owns a second property - it's called Greece". This billboard sparked fury from respected members of the Greek population in London, but the reasoning behind the jibe could cause a much bigger political and financial rift.

It is well documented that Greece has been bailed out by a European Financial Stability Facility (EFSF) that was heavily contributed to by Germany. Unsurprisingly, public sentiment in Germany smacks of frustration with the level of bailout required. This sentiment is now manifesting itself in the form of pressure on German chancellor Angela Merkel to limit the amount of funds offered by Germany to bail out its counterparts.

If Merkel follows the German crowd then the European debt crisis is likely to rear its head again. So how could this affect the Euro exchange rates?

The majority of European (and world) financial leaders are calling for a major security blanket to be created that will protect Europe from any future crises. The EFSF was developed in 2010 as a temporary measure and expires next year. Ministers are now looking to build a permanent "firewall", called the European Stability Mechanism (ESM), worth €1tn. Angela Merkel has been publically sceptical about the mechanism and particularly about the size of firewall being discussed. Perhaps this is due to a domestic resistance and reluctance to risk any more of German taxpayers' money.

Financial markets like stability. The bigger and more solid the bailout fund the more positively the markets will react. As a result, European share prices, government bonds and - most importantly - the Euro itself would likely become more stable. This has been proven by the positive quarter that European markets have enjoyed this year as a result of stability being achieved in Greece. Welcome news to British exporters who felt a very real threat of a Euro collapse in late 2011, which would have been extremely damaging to export prices.

As it appeared that the German chancellor was reluctant to commit to the ESM, markets started to creak once more. Spanish bond yields are now under pressure and European stock markets have seen their advances tempered over the last two weeks - all of which has pushed the Euro slightly weaker again.

Though there are rumours abound that Merkel might be showing signs of changing her mind, she has stated publicly that the ESM is an essential step forward - even if only at €500bn strong. Although this has provided solace to the financial markets, there is potential fall out ahead over the size of the mechanism itself.

If strong action is not taken to safeguard European nations and investors against future financial crisis, the Euro is likely to weaken heavily. However, if Merkel's apparent U-turn continues and the ESM is agreed, the Euro could regain ground. This has led many Finance directors to adopt a protective currency hedging strategy that also offers them the chance to take advantage of any favourable movements. Given the uncertainty that continues to run the markets - this is a wise move.

Torrie Callander is a corporate dealer at business foreign exchange specialists, Global Reach Partners

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