FINANCIAL RISKS TODAY ISSUE 2

E-Edition out now

CURRENCY

In an ominous statement, Greek officials have warned that either Greece reforms its economy and makes sever cuts or it should return to the Drachma.

Now, that may not necessarily be a bad thing for Greece to do.

With control of your own currency, governments can, and do, use monetary policy to ease the deficit problem - re: UK - but without that control, there are very limited things that a government can do.

In addition there is the issue of what is the natural balance for a country.

It seems that the natural balance for Dollar/Sterling is between 1.45 and 1.65. Apart from a few blips, this range appears to be the norm as far as Forex is concerned.

Indeed, one of the major issues for the UK when it was in the ERM was that its peg to the Deutschmark was too high and the economy paid the price.

Some in the insurance industry have just come back from a golfing jaunt business conference in Spain and complained about the price of beer.

For years, Spain, Greece and Portugal were the destinations of choice, in part because of their relative cheapness after currency conversion. However, following the Euro, many noticed how much prices had gone up. Now, there was a sleight-of-hand mark-up in prices but also the currency was linked with that powerhouse Germany so prices went up after conversion.

If Greece does return to the Drachma, not only will it return to having a degree of control over its economy but in addition, prices will fall and tourists will return in their droves.

Is that necessarily a bad thing?

CREATING EMPLOYMENT

This morning, the OECD published its latest Economic Outlook.

Despite the recovery there are still many risks around and one of the keys to maintaining the recovery is apparently employment.

But how can this be achieved? Here in the UK we are facing the potential of state employees flooding onto the jobs market where the government hopes the private sector will pick up the slack.

Yet nothing is that simple.

How can people become employed? Where is the room for further workers when downsizing has been the rationale in this so-called post-industrial age?

These are questions that can challenge the most erudite academic let alone policymakers but they are questions that, according to the OECD, must be addressed for all our sakes.

BoE TURNS TO TEENAGERS OVER INFLATION

Far be it for me to make fun of an initiative designed
to promote financial awareness among teenagers but, in light of government figures out today and the missed inflation target once again, should we be worried that the MPC may have run out of ideas?

This week marks the launch of the twelfth Interest Rate Challenge, the competition designed to give 16 to 18 year old students across the UK the opportunity to take on the role of the Bank’s Monetary Policy Committee (MPC) and set monetary policy for the UK to meet the inflation target of 2.0%. 

Bank of England press release 

Yeah, I know it's the 12th such competition but I couldn't resist!

photo: FreeFoto.com 

A LOAD OF BANKERS...

had an interesting breakfast this morning - although I suspect not as interesting as certain footballers had - after Moody's announced it may downgrade their credit status after a review.

The downgrades are to do with the UK government and regulators shutting the public purse and saying, basically, you fail it is up to you, your bondholders, and your sector to sort it out.

This is not to do with how credit-worthy, that is "are you good for your loan?", banks are, and so far it appears that the FTSE thinks banks are, good for their debt with shares only falling a tad as news came out of the possible downgrades.

Which makes you think: So how powerful are rating agencies?

OK, in the next Financial Risks Today, you will see that even rating agencies admit that they made mistakes but the opprobrium they have had appears to miss the point that investors should be making decisions holistically rather than solely on a ratings note.

In addition, politicians should reign their necks in a bit. It is their policies that are leading to sovereign debt downgrades, it is their policies that are preventing any sign of recovery for indebted Eurozone countries and it is their policies that could see the entire Euro project fail.

It is because of their policies that rating agencies see fit to downgrade their countries.

MARKET JITTERS

So the US has joined Europe in sending out the smoke signals over the continuing concerns over PIGS in general and Greece in particular.

With rating downgrades for Greek and Italian debt and the hammering that Spain's ruling socialist party received in the local and regional elections, understandably people are worried.

The key will be what the Greek government decides to do later on today as debt owners wait and see
whether the promise not to "restructure" comes to fruition.

However, as is usual in politics, once something is denied three times then usually it will come true so we could be in for some interesting times ahead.

WELCOME

Hi and welcome to Financial Risks Today's blog. We hope over the months to come that we can give our opinions over the headlines of the day relating to everything to do with risks and the financial world, be it regulation, politics or investment.