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How to Control a Currency Panic
Published: October 27, 2008
The financial crisis has ratcheted up a dangerous notch. The currency markets have gone topsy-turvy. The authorities now have to make some pretty big and delicate moves — something like performing microsurgery in a plane in turbulent skies.
The yen has risen by 40 percent against the euro since August, with most of that occurring in October.
This month, the Australian dollar has also fallen by 25 percent and the pound by 16 percent against the American dollar. Swings of this scale are alarming when they happen in the stock market . But they are petrifying in currency markets, because they make it virtually impossible to price exports or imports.
What’s going on?
Mainly, the pace of financial de-leveraging is accelerating. In particular, so-called currency carry trades — borrowing cheaply where interest rates are low, for example in Japan, and lending the funds where rates are high, such as in Australia or the euro zone — are ending abruptly.
The unwinding of these trades has jerked currencies around enough to provoke more margin calls on traders, amplifying the pressures on them to sell. Then there is fear: Investors are selling currencies of countries that import foreign capital, precipitating currency crises in eastern Europe and Korea that further hurt their economies.
This combination of de-leveraging and fear has also pushed stock markets into something like a free fall. Japan’s Nikkei index is at its lowest since 1982, the MSCI index of non-Japanese Asian stocks is down 33 percent in October and Western stock markets continue the downward spiral initiated by the credit crisis.
While corporate credit, currencies and stocks are in trouble, government bonds are still strong. That’s a relief, since the markets are turning to the world’s governments to do something to stabilize lending between banks and corporations and, now, international cash flows.
To stop the currency panic, the world’s governments should work together to set and then defend target exchange rates. That will probably require countries with big reserves of foreign currency, like China or Japan, to deploy some of the cash for the greater global good, and overspending countries like the United States and Britain to accept devaluations and lower standards of living.
It won’t be easy, but the alternative — a breakdown in the global trade system — would be far worse.
Cut the Carry Trade
The expansion of the crisis from credit to foreign exchange has made even clearer the dangers of some types of speculation. In particular, the currency carry trade has been shown up as most unhealthy.
The practice of borrowing in currencies made cheap by low interest rates, like the yen, and investing in high-yield currencies like emerging markets works wonderfully so long as times are good. Speculators don’t just benefit from this difference in interest rates, they can also enjoy a capital gain as the assets they jump into rise in value.
But when the market turns and the herd stampedes for the exit, capital gains turn into losses. That’s what is happening now. The sharp rise in the yen and, to a lesser extent the dollar, is forcing speculators to repay their hard-currency loans before the currency mismatch sinks them, with the effect of whipsawing emerging market economies. .
For speculators, this painful lesson is ultimately salutary. Once burned to a crisp, many times shy. But the collateral damage is more distressing.
The banks that lent to the carry traders suffer. Investors like pension funds and insurers who hold the assets now being dumped by carry traders find the value of these assets are falling dangerously close to their liabilities. Exporters who sell goods in rising currencies — most obviously Japanese companies — face a huge squeeze on profits.
The currency rebalance should lead to an economic catharsis. The rise in the yen could help rebalance world trade, although the rise in the dollar works in the opposite direction. Certainly, countries like Britain, with its yawning current account deficit, could benefit from a cheaper pound.
That said, this is hardly the moment for the global financial system to face more big losses, more runs on financial assets and, in response, more government capital injections for banks and perhaps insurers.
However this crisis pans out, one thing should be clear: Huge currency speculation of the kind that made the currency carry trade a cornerstone of global finance in recent years is highly destabilizing. When this crisis is over, the authorities should aim to reduce it.
Written by: EDWARD HADAS and HUGO DIXON
Courtesy: Pounds to Euros | breakingviews.com | nytimes.com
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Spanish banks solid, but economy feels crisis
Tuesday September 16, 11:40 AM
MADRID, Sept 16 (Reuters) - Spanish banks have minimal exposure to Lehman Brothers (NYSE: LEH - news) , and remain healthy, but worsening global financial market conditions will have an impact on Spain’s economy, the Bank of Spain said on Tuesday.
The comments follow concerns smaller Spanish banks could be forced to seek fresh capital if the international financial crisis drags on and bankruptcies continue to soar in Spain’s stricken property market.
‘The direct impact of the Lehman bankruptcy for Spanish banks will be minimal, given their exposure is practically non-existent,’ Bank of Spain Director General of Research Studies Jose Luis Malo de Molina said in a statement to Reuters.
‘The Spanish banking system is facing the international crisis from a healthy position, with good levels of solvency and profitability,’ he said, reiterating past statements.
‘However, it is necessary to recognise this episode signals an intensification of the serious international financial crisis, that also has consequences for the Spanish economy,’ Malo de Molina added.
Spain was the only one of the euro zone’s four biggest economies not to contract in the second quarter after the government drew on its budget surplus to launch a 38 billion euro economic stimulus package.
The European Commission expects the Spanish economy, fourth largest in the 15-member currency bloc, to contract in the third quarter and enter recession by year-end.
Spain’s Socialist government hopes for an economic recovery in the second half of 2009. Analysts say it could take longer given the country’s high dependence on house-building and real estate sales to drive growth.
Spain’s biggest banks, Santander (Madrid: SAN.MC - news) and BBVA (Madrid: BBVA.MC - news) reined in mortgage lending before the country’s real estate bubble burst and the country’s banking system has some of the world’s strictest reserve requirements.
Analysts have expressed concern over the high exposure to Spain’s property sector of medium-sized banks such as Popular and Pastor, as well as savings banks, or cajas.
The Bank (TBHS - news) of Spain has said the country’s banking system is not immune to problems in the event the crisis in international financial markets drags on.
(Reporting by Andrew Hay; Editing by Jason Webb and Stephen Nisbet)
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Spanish Property Market - The Property Crisis Explained
By Nick Snelling
The news from Spain, at the moment, is hardly encouraging for those wishing to buy here. Almost daily there are reports of Spanish property developers going bankrupt and Spanish property prices have been sliding for the past two years, with a major downward acceleration occuring over the last few months. However, along with all the problems there are also tremendous opportunities. But, first, you need to understand the Spanish property market and what has happened.
In fact, the property crisis in Spain has come as little surprise to many observers. Over the past few years Spain has experienced an astonishing economic boom that has been largely driven by property and the huge demand for it. Unfortunately, the boom was uncontrolled and led, in the memorable words of Alan Greenspan (in a different context), to an ‘excess of exuberance’. This, to some extent, was understandable as Spain benefited from a remarkable confluence of property market initiators.
Indeed, crudely, for some ten years Spain had the good fortune to have four different property markets interacting at the same time - all encouraging building and pushing Spanish property prices ever higher until the whole economic edifice became unsustainable.
The first Spanish property market was powered by North Europeans, who generally come to Spain to retire. Their dream was (and remains) remarkably similar, almost irrespective of what they had to spend. Most North Europeans wanted a three bedroom, two bathroom villa with a pool, on a flat plot, within fifteen minutes of the sea. Invariably, these villas did not exist in the past due to historic Spanish land use and had to be newly built to satisfy the liquid wealth that was pouring into the country. Huge, new estates of villas therefore quickly grew up on the outskirts of most coastal towns.
The second market was the general Spanish property market where there was a demand, from the Spanish themselves, for modern housing to replace the town houses of old. Adosados (semi-detached houses) with their clean lines, garage and light, airy rooms (on the face of it) achieved this objective. Anyone who has been into an unreformed, old town house, within a rabbit warren of impossibly narrow streets, can appreciate how much the Spanish must have revelled in these new style properties.
The third market allowed the Spanish to leave their old town houses and was driven from an initially unexpected quarter - mass immigration, albeit not from wealthy, first world Northern Europe. Immigrants from South America, North and Sub-Saharhan Africa, Bulgaria and Romania poured into the country (at some 700,000 people per year) secure that they could gain employment, ironically, often in the construction industrty. Able to buy only the very cheapest Spanish property, they bought the unreformed town houses and decaying flats of the native Spanish.
Finally, the new wealth of the native Spanish and the holiday desires of North Europeans produced a massive demand for beach apartments. These were almost as important to the Spanish as to North Europeans as, oddly enough, the Spanish dream is represented by owning a beach front apartment.
The net effect was a time of wonder for developers, both big and small. North Europeans were buying everything at the top of the market and the immigrants everything at the bottom of the Spanish property market. This created great wealth and allowed the Spanish themselves to buy into new adosados and modern, flats. Barely constrained by planning regulations, promoters of all sizes built and built - with not a thought to the future.
So great was the frenzy that many native Spanish gave the Spanish property market a further nudge by taking advantage of the building boom to buy into off-plan developments. Paying a small deposit allowed them to gain the opportunity to invest in a new development with the absolute intention of selling their adosado or flat for a profit - prior to completion of the build. Of course, if they misjudged the timing and were unable to sell their investment then they would inherit (in Spanish terms) a huge mortgage that was never intended. And with the purchasing power of the Spanish salary not having changed in ten years this could (and now is) proving ruinous for many.
By the spring of 2008, the ruinous nature of Spanish over-building (some 500,000 new properties per year too many) finally became obvious to everyone. Indeed, it is estimated that by the end of 2008 there will be some 2 million properties for sale. To make matters worse Spain, like the rest of the world, has been hit by the lunacies of the credit crunch, together with the horrors of high oil and consumable prices. The result has been a Spanish property market slump that is likely to last some years.
So, as a potential buyer, what do you do?
Firstly, it is vital to remember that all Spain´s constants - the very reasons for coming here - remain. The country has not moved several hundred miles down the African coast and life should never be delineated soley by the wisdom or otherwise of property investments! The climate in Spain is heavenly and the infrastructure that has developed over the past few years is superb.
The education and medical care systems are comparable (and often better) than North European countries, travel throughout the land is easy and the Spanish people are as tolerant and welcoming to foreigners as ever. Better still, Spain provides remarkably good value for money and a lifestlye that (according to uSwitch.com) recently topped the European quality of life index. Property problems or not, Spain remains a marvellous place in which to live.
The Spanish property slump is serious and the consequences should not be minimised. However, in fact, now is the very time to buy here. The desperation of many sellers, both Spanish and international, means that there are some stunning bargain properties to be gained - either for investors who wish to develop a portfolio or those wanting a holiday or retirement home. Indeed, it is when a market is at its most volatile that the brave buyer can really benefit and take advantage of the tremendous opportunities (and bargain properties) that exist when others are panicking.
That said, the line between a volatile, panicking market and one that stabalises can be surprisingly thin. Past experience suggests that the time to buy is when there is still turmoil and fear in the market and whilst genuine bargain properties are still for sale. Delay for too long and you can find that the best opportunities have been snapped up and that sellers have hardened their position and reconciled themselves to not selling until they can obtain the prices they want - even if this means waiting some years.
Already professional investors are starting to buy in Spain, well aware of how property markets work. So, if you are thinking of buying, think yourself lucky that you did not do so a couple of years ago - and take advantage of some of the incredible bargain properties now on offer. You may be rewarded by gaining a wonderful, long term home in a country delivering one of the finest overall lifestyles in the world!
Nick Snelling is a published author, freelance journalist and director of Spanish Goodlife.com. A selection of his recent articles on Spain can be seen on nicholassnelling.com Contact Nick for further information, articles, copywriting or his new book ‘Taking The Heat.
Article Source: EzineArticles.com/?expert=Nick_Snelling
Great Places to Buy Spanish Property
By Tracy Hildreth
With the beautiful sandy beaches of the Mar Menor (Sea of Menor) only 700 meters away, the resort offers the best combination of beach, sea, sand and golf anywhere in Murcia Spain.
There have been 2 golf courses designed by world famous golf professionals to make championship courses in length plus the first course offers spectacular views of the Mar Menor and its islands, and at over 7km long will challenge even the best players. The second course is a great Mediterranean oasis, with lakes in play on 10 holes, deep vegetation and fantastic views of the Mar Menor, old mills and the Monastery make it a pleasurable and enjoyable course to try your luck on.
With overall investment of some 1 billion euro’s, this area is without doubt the most ambitious project of all those created in the Mar menor and Costa Calida areas of Murcia, Southern Spain. With exclusive residential areas, luxury hotel zones, shopping and leisure areas, natural spaces and paradise like beaches to ensure it is really setting a standard for the Murcia region.
Phase 1 of the development has recently been launched La Isla and offers a great opportunity to invest in the resort at the lowest price level.
Even though the worlds property boom has been slowing down, in particular in Spain it is also worthy to note that the Murcia region of Spain shows no sign of slowing down any time soon which makes this area a great place to invest in for a Spanish holiday home, to rent out or to live in year round.
If you are interested in buying Spanish property abroad then you will have to research each area, decided upon whether you are going to buy property in Murcia, or more specific in a gated or golf community. Once you have decided on buying property in Murcia, Spain you should then research companies – some even offer free trips.
Cactus resorts is specialists in Polaris world Spanish Villas and Property to buy in Murcia Spain. Mancala Technology are specialist in Internet Marketing.
Article Source: EzineArticles.com/?expert=Tracy_Hildreth
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