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Old 13th December 2008, 12:28 PM   #1
Davehodgo
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Default Pound against the Euro. a few questions

I'm moving to the costa del sol with work in february. i would like to know your views on the fall in value of the pound against the euro. has this effected you? are you paid in pounds?

does anybody have more of insight into this, can you tell me if you think the day will come when its a pound for euro or will the pound regain its strength?

is the spanish cost of living coming down to compensate? ie petrol etc.
what is spain doing to keep the british tourist coming there on a weak pound?

if you have any insight i would love to know.
thanks
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Old 13th December 2008, 06:04 PM   #2
Legazpi
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Originally Posted by Davehodgo View Post
I'm moving to the costa del sol with work in february. i would like to know your views on the fall in value of the pound against the euro. has this effected you? are you paid in pounds?
I work in Madrid and am paid in euros, so it has not really affected me, except that now I'll be doing my XMas shopping in the UK.

How long will you be working in Spain for? It could be worth trying to get paid in euros anyway, because apart from avoiding commission fees when exchanging money, it's generally quite useful to hold money in more than one currency: if the pound is low you can pay for things from your euro bank account, and if the euro is low you can pay for things from your pound bank account

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does anybody have more of insight into this, can you tell me if you think the day will come when its a pound for euro or will the pound regain its strength?
I'm no economist, and I don't think anybody really knows anyway. I've read that people think the pound will keep falling against the euro for a couple more months, and may well reach parity. After that some people expect the ECB will start slashing interest rates and the euro will then start to fall. However, if I knew these things in advance I'd be a very rich man by now.

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is the spanish cost of living coming down to compensate? ie petrol etc.
what is spain doing to keep the british tourist coming there on a weak pound?
I'm afraid keeping things cheap for British tourists is not very high on Spain's economic "To do" list at the moment. You might find that prices of certain things (e.g. houses) have dropped down south because they've been badly hit by the collapse in the construction industry there (i.e. there is less demand), but I that's the case in the UK as well.

Sorry I can't be much help. At least with a job down there you'll be doing a lot better than many people.
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Old 13th December 2008, 06:09 PM   #3
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I don't know what the long term effect will be - I reckon there are a few in the banking industry would like to know the answer to that
It's certainly made living on pensions paid in pounds a bit more difficult. I'm hoping the rate improves before I have to pay my taxes in June
But what the H... the sun keeps on shining most days.
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Old 13th December 2008, 07:23 PM   #4
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An American's view: The LIBOR rate is as low as it can get. The banks have to grant more loans somehow. Also, there has some other forms of economic stimulus as well. Otherwise, might as well risk switching to the Euro. I'm sure the British sovereignty can withstand that change. The question is, can you afford not to change?
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Old 14th December 2008, 02:25 AM   #5
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It was a slow decline, (year and a half ish), I reckon it's going to take a while (longer!) to go back up. You know, if we adopt the Euro, everything will be more expensive. Ask anyone in Europe what happened when they changed to the euro!
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Old 14th December 2008, 12:17 PM   #6
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The best argument against joining the euro is to simply imagine what would have happened to the UK economy if it had joined the euro back in 2002. Since 2002 up until last month, euro interest rates have been significantly lower than the those for the pound. So the UK would have had an even bigger housing/credit boom than it did.

However the double-whammy is that the UK would now be affected even more by the credit crunch, and would therefore now need to lower interest rates even more to kick-start the economy. But the euro interest rate is now higher than that for the pound, so it would be making things even worse.

In short, the most important tool for controlling and economy is interest rates. Having one interest rate being applied to several different economies (as is the case with the euro) is a recipe for disaster. Yes the pound is tanking, but the UK economy as a whole is in a better situation than it would be if it were tied to the euro.

Last edited by Legazpi; 14th December 2008 at 12:19 PM.
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Old 14th December 2008, 01:15 PM   #7
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Yes the pound is tanking, but the UK economy as a whole is in a better situation than it would be if it were tied to the euro.
But isn't the pound tanking faster than the euro and aren't interest rates already low as they can get in the UK?
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Old 14th December 2008, 04:21 PM   #8
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So the UK would have had an even bigger housing/credit boom than it did.
The housing boom has been affected by many factors. The creation of Liar Loans (whereby people wrote their own salary figures, and the banks didn't check) and the granting of mortgage on 4 or 5 times salaries, have been 2 of the greater factors. Against this, a couple of points either way on interest rates wouldn't have affected things to any extent, especially as people were seeing (unearned) gains in house price value of £2k a week at the height of the bubble. What would have slowed the price bubble would have been effective control of the banking system, so that people were forced to put down 20% deposit on a new house and be unable to borrow more than 3.5 times their salary. Anyway the net effect is that people have been paying twice the long-term value to buy a house. This amount of money has to be paid back, and is now being sucked out of the economy, creating the current deflation. Things will improve once house prices revert back to the long-term norm, debts are repaid, and confidence resumes. The danger however is that the Government itself borrows so much that the currency becomes worthless.
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Old 14th December 2008, 04:31 PM   #9
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I wonder if the industry has grown bubble dependent.
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Old 14th December 2008, 08:25 PM   #10
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But isn't the pound tanking faster than the euro and aren't interest rates already low as they can get in the UK?
Interest rates are 2% in the UK, but will probably hit 0% (or close to it) next year. I expect that 0% interest rates are already priced-in to the value of the pound on the currency exchanges. What might make it fall further against the euro is if the European Central Bank decides not to cut its interest rates by as much as traders expect it to. Germany has the biggest say in that matter, and the inflation-phobic Germans don't like low interest rates.

Of course the Bank of England could easily stop the pound from falling by putting interest rates up, however the value of the pound is not its main priority right now: getting money into the economy is. Having said that, the Bank of England has recently hinted that concerns about the pound's demise might prevent it from slashing interest rates as quickly as it planned.

While the value of a currency is an indicator of how well an economy is doing, it is just one indicator, and is also somewhat dependent on the priorities of those who run the economy. For example, Spain's currency has been strengthening against the pound for over a year now. However it's difficult to say that Spain's economy has been performing better than that of the UK.
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Old 14th December 2008, 09:09 PM   #11
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The housing boom has been affected by many factors. The creation of Liar Loans (whereby people wrote their own salary figures, and the banks didn't check) and the granting of mortgage on 4 or 5 times salaries, have been 2 of the greater factors. Against this, a couple of points either way on interest rates wouldn't have affected things to any extent, especially as people were seeing (unearned) gains in house price value of £2k a week at the height of the bubble.
If the interest on your mortgage drops from 5% (the level it has typically been in the UK since 2002) to 3% (the level it has typically been in the the Eurozone since 2002) then your mortgage interest payments drop by 40%. I'd say that's a pretty big reduction on your mortgage payments, and allows you to spend quite a bit more on your house = house price inflation.

3.5 times salary was considered the limit for mortgages during the 90s, when mortgage interest rates were typically 7%. For the last 10 years, as I mentioned above, mortgage interest rates have been around 5%, i.e. nearly 30% lower. Lending 5 times salary when the long term average interest rate is 5% is no more reckless than lending 3.5 times salary when the long term average interest rate is 7%.

I agree that lending 6 times salary and 100% mortgages has been reckless, and self cert loans plain stupid. The FSA should all have been sacked, and the likes of Northern Rock left to go bust. However I can't see how they are more significant than interest rates.

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What would have slowed the price bubble would have been effective control of the banking system, so that people were forced to put down 20% deposit on a new house and be unable to borrow more than 3.5 times their salary. Anyway the net effect is that people have been paying twice the long-term value to buy a house. This amount of money has to be paid back, and is now being sucked out of the economy, creating the current deflation. Things will improve once house prices revert back to the long-term norm, debts are repaid, and confidence resumes. The danger however is that the Government itself borrows so much that the currency becomes worthless.
The Bank of Spain strongly encouraged people to put down a 20% deposit on houses. This didn't stop them from having a house price bubble, though it might reduce negative equity now the bubble has burst. Again, what caused Spain's (and Ireland's) property bubble was their level of interest rates. Both Spain and Ireland had booming economies from 2002 until 2007, yet membership of the euro meant they had low interest rates, leading to property bubbles in both countries.
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Old 14th December 2008, 09:13 PM   #12
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I wonder if the industry has grown bubble dependent.
Parts of the property industry in the UK and Spain certainly became speculation dependent.
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Old 15th December 2008, 02:30 PM   #13
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.... For example, Spain's currency has been strengthening against the pound for over a year now. However it's difficult to say that Spain's economy has been performing better than that of the UK.
This is because it is not just Spain's currency - the Euro is that of the whole EU (Britain excepted for reasons not even most of them understand )
This makes the EU member countries cut back on excesses to some extent, again Britain being an exception so that over the last 5 or 6 years the British government has been able to spend more than it should and has kept interest rates higher than would have happened otherwise. When the world banking system went belly up it therefore left Britain in a very exposed position, which is what we are seeing the effect of now.
And today's news of the multi billion $ swindle, set up by a hedge fund manager and colluded in by the banks, is not going to help anyone much.
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Old 15th December 2008, 03:34 PM   #14
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And today's news of the multi billion $ swindle,

This news broke last thursday in some spanish media, due probaly to the large exposure of spanish banks to the fraude. However, it is beyond me why BBCnews24 has chose not to report it until now. Maybe it wasn't a good time to break more bad news. Another story which appeared in a scottish newspaper last week and has failed to make the headlines is that of the beleagured HBOS.

100 staff and their partners on an all expenses paid 4 day jolly to New York, spending money included, apparently as a reward for exceptional performance during the year. Maybe having a kneesup with Lehman brothers, Freddie mac& may.

The od boss of HBOS re-employed by the group merger for 60,000 . No, not annually, but monthly. I can't remember, dollars euros or pounds , not much difference now.
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Old 15th December 2008, 04:24 PM   #15
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This is because it is not just Spain's currency - the Euro is that of the whole EU (Britain excepted for reasons not even most of them understand )
Yes. The euro is an exception since its value is an indicator of the performance of the Eurozone as a whole, not that of any particular country within it. I was trying to use Spain as an example to show how just because a country has the euro, and the euro is strong, it doesn't follow that that country necessarily has a stronger economy than the UK.

Put it another way, if Spain was outside the euro right now it would be slashing interest rates like the British are in order to kick start its economy, and its currency would also be devaluing. The fact that Spain can't do that seems to be more of a restriction than a blessing. Zapatero has been complaining about the high Euribor all year.

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This makes the EU member countries cut back on excesses to some extent, again Britain being an exception so that over the last 5 or 6 years the British government has been able to spend more than it should and has kept interest rates higher than would have happened otherwise.
I think we should perhaps make a distinction between government debt and personal debt. Before I was saying that had the UK been part of the euro, the even lower interest rates would have caused an even higher level of personal debt, i.e. the debt held by each individual within the population (credit cards, loans, mortgages, etc), which would also have created an even bigger property bubble.

Regarding government debt, I think you have a valid point in that the UK government would not have been allowed to take on so much debt, had it adopted the euro. I believe that eurozone membership entails certain restrictions on how much government debt a country can have, though I don't really know the details. However I don't think there are any restrictions on the levels of personal debt allowed within each member country. I think levels of personal debt are largely dictated by interest rates, and that interest rates have been kept too low since Sept 11, 2001.

Also, being outside the euro did not force the UK government to take on so much government debt. That just happened to be the course chosen by the particular UK government at the time. Other UK governments in the past have been able to run the UK economy with much lower levels of government debt.

Last edited by Legazpi; 15th December 2008 at 04:36 PM.
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Old 15th December 2008, 06:48 PM   #16
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You make some good points Legazpi!
Personal debt is also influenced by the job market I believe. The UK has had a period of fairly good prospects for staying in employment and this must encourage people to be willing to enter into longer term debts. Even now I think the UK figures for unemployment are less than Spain's with fewer inhabitants.
I still wonder if the "eurozone effect" just means that they get the full effect of the crunch later. We shall see!
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Old 16th December 2008, 08:20 AM   #17
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Default you make some good points

my problem is i am being sponsored to work at a church on the costa del sol and i'm currently seeking more sponsorship. i have been pledged 500 pounds a month so far, now back in sept that was around 640 euros its now 550 euros thats a big difference and although cost of living is cheaper still in spain its still painfull. i can only imagine what that feels like for Uk pensioners living in Spain?

somebody give me some good news!! someone tell me the pound will grow in value again or maybe i just need to accept it and move on?

again thanks for all your feedback.
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Old 16th December 2008, 08:56 AM   #18
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Originally Posted by Davehodgo View Post
my problem is i am being sponsored to work at a church on the costa del sol and i'm currently seeking more sponsorship. i have been pledged 500 pounds a month so far, now back in sept that was around 640 euros its now 550 euros thats a big difference and although cost of living is cheaper still in spain its still painfull. i can only imagine what that feels like for Uk pensioners living in Spain?

somebody give me some good news!! someone tell me the pound will grow in value again or maybe i just need to accept it and move on?

again thanks for all your feedback.
I guess you could try telling yourself that the lower the pound goes, the less room there is for it to fall any further. But really we're speculating on currencies here, and I'm certainly not savvy enough to do that.

In general, if you are holding a currency you think is about to fall, then you could exchange some of it for another currency that you think is more stable. I think that is known as currency hedging. But that still leaves you with the problem of trying to predict which way currencies will go. I don't think anybody can really do that, especially these days when everything is so volatile.

Yes it must be terrible for pensioners right now. This is certainly making me take another look at how I plan for the future.
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Old 16th December 2008, 10:56 AM   #19
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Another positive note for a lower pound is that british exports will go up as they become relatively cheaper.
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Old 16th December 2008, 12:02 PM   #20
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Another positive note for a lower pound is that british exports will go up as they become relatively cheaper.
Yes. However I think the UK has been a net importer in recent times, so in general terms the benefit of cheaper exports is outweighed by the downside of more expensive imports. That should lead to inflation, but the fact that nobody can get hold of any money right now is preventing inflation, and some people are even talking about deflation, which would be good for people with savings, pensioners, and those lucky enough to still have jobs at the end of all this, but bad for people who have debt (i.e. the vast majority of people in the UK).

I think that is why the UK has not been so concerned about the fall of the pound: they are more frightened of deflation and hope lower interest rates will pump more money into the economy.

However they have to be very careful not to pump too much money into the economy because with a devalued currency deflation can quickly turn into hyperinflation, which is a far worse scenario.
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