Spain’s euro woes highlight wider opportunities for UK importers

From a financial and economic perspective, these are interesting, difficult times for Spain. I’ve mentioned in previous articles about the danger that the markets might begin to pick off weaker Euro zone countries one by one, and such a scenario appears to playing out.

Spain’s banks are now in the process of being bailed out by the European Financial Stabilisation Mechanism (EFSM) which comes as no surprise to those who saw how recklessly Spain’s banking sector behaved when buying into the Spanish property boom. Where this will end is anybody’s guess given that, firstly, the property market represents an alarming percentage of Spain’s GDP and, secondly, the current bailouts assume no further deterioration in the value of the existing loans on Spanish bank books. If asset – property - prices keep falling, one would assume more support will be needed to prevent the banks becoming insolvent.

Concerns about Spain are reflected in Spanish 10-Year government bond yields which have been knocking on the door of seven per cent of late. So how is all of this impacting on the value of the euro which, in turn, affects costs for those importing products from Spain and the rest of the Euro zone?

In relative terms, Spanish products have actually been getting less expensive for UK importers. For the past month, UK sterling v the euro has hovered around the 1.24 to 1.25 mark, the euro having weakened considerably during 2012. This is a good time to be importing from the Euro zone, for sure.

Even so, it’s still vital to have a currency strategy in place as the recent bailout of Spain won’t be the end of matters where the Euro zone crisis is concerned. Austria's finance minister Maria Fekter recently said that Italy might also require financial help soon due to its high borrowing costs. She also added that Euro zone rescue funds, which have been stretched by supporting Greece, Portugal, Ireland and Spain, could be insufficient to cope with Italy as well.

In theory, this, the dreaded ‘contagion’ scenario, should send the euro tanking even further against supposed safer havens such as UK sterling and the US dollar. But the reason for a currency strategy is this: where currencies are concerned, there are no sure-fire safe havens right now. Consider this: at the same time as Spanish banks are being bailed out, the Congressional Budget Office (CBO) in the US has recently issued its annual long-term budget outlook report. The 2012 numbers see the CBO estimate that US federal debt will rise to 70 per cent of GDP by the end of the year. This is the highest percentage since World War II. So, while the euro might not look very attractive right now, you wouldn’t want to be putting too much faith in the US dollar either.

The message in all of this is simple: hedge your bets as further currency volatility is inevitable. Snap up some euros around that aforementioned 1.25 mark and purchase Spanish products at what will be, for UK importers, the most competitive prices for more than three years. But build in some scope for further euro purchases later in the year. All other things being equal, we’d expect the euro to deteriorate even further.

At Smart Currency Exchange, we update our views on the euro/sterling exchange rate on a daily basis. We also produce on a monthly basis our “Outlook” report which pulls together our thoughts and those of the mainstream banks on where to next for exchange rates. Download your copy now at www.SmartCurrencyBusiness.com or call us on 0845 638 0571 (or +44 (0)207 898 0541) to discuss your situation.