The UK’s problems following the electorate’s vote to leave the EU may not be as catastrophic as expected when you take into account some of the problems that could rear their head in the Eurozone.
First off, inflation. Inflation has been a key concern for the European Central Bank (ECB) for some time and it is proving to be an almost impossible problem to solve. Mario Draghi the head of the ECB has used practically every monetary tool at his disposal in order to combat deflation. None of which has had the desired effect which includes pumping in €1.3 trillion into the struggling economy. I would compare it to the similar enigma of having a successful English football team, the problem seems insurmountable.
Let us also look at Greece. Although this problem is trying to be hidden like a Monika Lewinsky dress. The debt repayments to the International Monetary Funds (IMF) still need to be made and they are going to be exceedingly difficult to meet. This is a problem which will not go away and if drastic action is needed to be taken, expect the Euro to take a severe hit.
There is also the small matter of Italy’s banks. There is currently €360bn in bad loans outstanding and there has not been enough action taken to minimise the damage if these are not repaid. If one of these banks goes, again the Euro will fall substantially.
Deutsche Bank’s troubles have been headline news for some time now. The miss selling of mortgages has landed the bank with a $14bn fine which they are unable to meet. Although many are very concerned with the situation I am not. The consequences of Deutsche bank going under would be cataclysmic. Their balance sheet is bigger than that of the entire of Germany and there are trillions in derivative trades linked to every major bank you can think of. It would be bigger than the Lehman Brothers collapse if they were to go bust.
A deal looks soon to be completed with the Department of Justice on a reduced fine of $5.4bn. This doesn’t surprise me, it is another case of an institution being too big to fail.
I could also throw in the threat of further referendums from EU countries, but as you can see the problems with the Euro are real and if any of these problems come to the surface, the Euro could be in for a rough time.
Clients should be cautious regarding the UK's recent referendum but equally cautious to problems within the Eurozone. Whilst Sterling has taken a hit, problems within the Eurozone could present a real threat to the single economy. Get in touch with our team if you have a currency requirement and have questions regarding todays report.
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