SPANISH CRISIS COULD BE TIP OF EURO ICEBERG

Daniel Stanley, Option Trader at London-based foreign exchange specialists Global Reach Partners

Daniel Stanley
Daniel Stanley

To borrow from one of most famous lines from Shakespeare’s Hamlet, something is rotten in the state of Spain today. Catalonian political figures being arrested and hauled before courts in Madrid on charges of rebellion and sedition or fleeing Spain to avoid such a fate are not the usual occurrences within a modern western democracy, especially one which is a fully- fledged member of the European Union.

Regardless of any leanings towards or against Catalonian independence (or a complete indifference about it), the recent events in Spain are a real concern for the wider European and international community.

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The reaction of Spain’s national government after the Catalonian leadership staged what was deemed to be an illegitimate referendum can only be described as heavy-handed. What is undoubtedly a significant political disagreement with one of its regional authorities was met with physical violence from police and the might of the country’s judiciary system. These unfortunate actions are having an adverse impact in many areas, not least the value of the Euro.

In early October, where around 90 per cent of Catalans who participated voted for independence, the Euro fell by 0.6 per cent against the dollar to approximately $1.174, one of its lowest levels since mid-August. Market analysts, who predicted at this point that the referendum would likely start a new phase of political instability for the EU, have so far been provedright. After making a small recovery, the Euro once again fell against the dollar later in the month when the Catalan regional assembly voted to leave Spain.

With the Madrid government branding the declaration illegal and Spain’s Supreme Court now pursuing rebellion charges against Catalonia’s ousted leadership, including the former regional president Carles Puigdemont, who knows what further adversity may follow. The EU’s failure to take any sort of action so far is not helping matters.

The Euro remained strong after the UK’s Brexit vote but the current Spanish crisis along with the recent German elections, which saw an unexpectedly strong showing from the right wing AfD, are now threatening to destabilise all that.

Events in Spain are worrying enough for the EU but they are also currently masking two other elephants in the room, namely Greece and Italy. While the media focus on these countries may have gone quiet for the moment, both have failed to meet fiscal reforms and austerity measures, all of which has real potential to trigger a serious economic crisis throughout the Euro-zone. Despite their dire predicament, both countries have managed to get funds, saving them from defaulting, but this situation is not viable in the longer run.

Italian banks are facing a crisis similar to the one which hit US and UK banks in 2008, sitting with around $400 billion in bad loans on their balance sheets. The country’s weak growth is making it difficult to address the problem. Meanwhile, the pain of reforming its economy continues to be inflicted upon Greece with questions still lingering as to whether it may still have to leave the single currency to free it from its current cycle of unmanageable debt.

These factors, along with Spain, have real potential to continue driving down the value of the Euro with wider global implications. Here in the UK, where manufacturing exports into the EU have recently soared on the back of a low Pound, a sustained fall in the single currency presents a major threat. While Spain itself only imports 4.1 per cent of its goods and services from the UK, its current actions threaten Britain’s trading position with all countries in the Euro-zone, including larger markets like Germany and France.

Any further pressure on the value of the Euro could see orders from these and all other EU countries decrease. This could also impact on the UK’s tourism sector, which had enjoyed a post-Brexit boost in 2016. Last year 25.3 million EU visitors came to the UK, up four per cent on 2015, a rise which was partly attributed to the weak Pound against the single currency.

A fall in the Euro is, of course, not all bad news for UK business. It presents an opportunity to lower costs for those which source goods in the EU or have employees based there. It is, however, vital that companies implement a robust and comprehensive risk-management strategy to minimise their exposure to foreign currency movements which often result from political uncertainty such as we are seeing in Spain.

Businesses with foreign currency requirements, especially those which trade across the UK and within EU nations, need to look at how they can best conduct their transfers strategically to manage their exposure and secure profitability. The starting point for developing such a strategy is to clearly understand what their level of exposure is in terms of currency movement. From there they can set out an appropriate budget rate and create a suitable hedging plan. Using a combination of forward contracts, spot deals and orders according to such a strategy can provide certainty and protection, shielding their bottom line and maximising the funds they receive.

No Shakespearian prose can gloss over what is currently happening in the rotten ‘state of Spain.’ With potential for the negative repercussions of this crisis and others looming within the EU to be felt far and wide, it’s important for businesses to safe-guard themselves and their exposure to foreign currency fluctuations which seem likely in the weeks and months ahead.

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