For a while now every nation has been keen to find ways of letting their currency weaken. It depreciates your debts a tiny bit and gives your hard pressed exporters a chance of winning orders and maybe even hiring someone.
But then the Greek debt crisis metastasised first into a European wide debt crisis and then into a Euro currency crisis as well. This joint crisis is where we are now. By choosing to not deal with the debt crisis, except by trying to hide it, our financial class has caused it to mutate into the double crisis we now face.
Governments were happy to let their currency slide. But now, rather suddenly, that helpful slide in worth has triggered a malignant growth in capital flight. And not just in Europe. The ECB had to massively intervene yesterday to prop up the Euro specifically to stem Capital Flight. But so did the Australian Central bank and so will the Indian Central bank before next week is out.
Suddenly what was seen as beneficial by nations and benign -ish by both the bond market and the Stock market (or at least they seemed to tolerrate it) has suddenly become a danger. And this is squeezing nations between two equally unpleasant alternatives. No one wants a strong currency. Hence all the arguments over the value of the Yuan. But now we are seeing currencies being sold because investors worry about the underlying security of currencies.
And capital flight, especially at this point, is no joke. As money leaves so does both capital holdings and liquidity in domestic markets. Just at a time when businesses and banks are desperate for both. WIthout them it just ramps up the urgency of their need to turn to interbank borrowing or Central bank loans.
India is especially vulnerable to capital flight, if it continues. India still feels on a high. The Middle class is still saying, ‘Look at me Ma! I’m on top of the world!’ Most of them do not see the clouds closing in. They will. Their bankers have.
Something similar is either going on in Mexico or will. They must surely be on someone’s list to short. Not Citi’s list obviously. But other people’s.
If cash does start to run out from riskier currencies this will hurt banks like Citi and Santander who heavily rely on cash income from their operations overseas to provide cash flow to hide their debts and pay a mimimal cash flow on otherwise non-perfroming ‘assets’.
Austrlia musy protect its currency or their miners will get mangled. A low currency will also pump nitro into their property bubble as Chinese money takes advantage.
All in all Capital and cash flight is another turbulent flow in an already chaotic whirlpool.
If the UK would just raise interest rates to 5%, squeeze the banks to a more honourable 2% margin on the vig, the UK might escape being next in line for a good kicking.
Joe Public can handle 5%, that used to be a good rate.
Foreign money would come back into the UK (Merv. seems to have held his reputation for some reason), the exchange rate would improve * and import costs would drop.
(* Anyone that says we need a lower exchange rate to help our exports is a good few years ahead of himself -we don't export much in manufactured goods, and we import absolutely everything, from cars to courgettes.)
Hello, Pro,
So why do you think they are keeping the rate so low for so long? I'd be intertested to hear your thoughts. Seems like housing and bank loans still. Protect those bad loans and the banks that still hold them at all costs – even at the risk of a run on the pound and borrowing rates.
What do you think?