By BILL BLEVINS features@algarveresident.com
Bill Blevins is the Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.
Over the last three years, the currency story for British expatriates has all been about the Pound Sterling and its fall from grace – it lost around a third of its value against the Euro and a fifth against the US Dollar.
This year the focus is shifting to the Euro. Uncertainty over Greece’s financial viability, not to mention concerns over other European economies, is plaguing the single currency.
Some analysts have even queried whether it can survive.
The problems of sharing a single currency across countries with divergent political priorities and economies has been brought sharply into the spotlight, as have the difficulties of getting 16 Eurozone States to agree on a solution.
At the end of March, Eurozone leaders reached agreement on a rescue fund for Greece, if needed. The Euro briefly strengthened as a result, but the sketchy details of the fund could not sustain the gains.
Eurozone finance ministers then took further steps to support Greece and prop up the Euro, announcing a 30 billion euro loans package on April 11. The IMF is also expected to offer financial aid if needed.
At the time, Jean-Claude Juncker, head of the Eurozone group of finance ministers, said: “This is the step of clarification that markets are waiting for – it shows there is money behind this.”
The Euro hit a one-month high on the announcement, but dropped again following the news that Greece’s budget deficit was worse than expected and of another credit rating downgrade for the country.
Then, on April 23, Greece formally asked for the EU-IMF financial rescue package to be activated. After market speculation over whether Germany would support the package, Angela Merkel, the German Chancellor, made a statement to pledge support for the aid package for the sake of Euro stability – but said it was contingent on certain conditions being met.
This is a developing situation and may well have changed again by the time you read this article. The outlook, however, is looking very challenging for the Euro.
With 16 different nations involved, there are both political and legal restraints to fixing the single currency. Economists warn that the Eurozone still looks divided and little has been done to address the longer-term underlying problems it is facing.
Most British expatriates holding Sterling assets would be pleased to see a stronger Sterling and/or a weaker Euro. The lowest currency risk option for an individual is to match assets (bank deposits, investments etc) and liabilities (day-to-day expenditure) in the same currency.
However, many British expatriates tend to retain a significant amount of assets in Sterling, including private pension arrangements, making them subject to the vagaries of currency exchange rate movements.
It is impossible to predict future currency movements with any certainty. However, in my opinion there is a strong possibility that the Euro could weaken further in the short to medium term while the Euro zone problems exist. I do not subscribe to the worst case scenario of the Euro failing, or of a Member State reverting to their original currency.
As a UBS Bank article reporting on research by its economists says, “Perhaps it would have been better for a number of countries if they had never joined the Euro. Nevertheless, the European Monetary Union is certainly not about to break up; at this stage, the costs would far exceed the benefits.”
Uncertainty about the fate of the Euro may be around for a while. What can you do to protect your assets? Swapping all your Euros to Sterling or another currency is not the answer.
For a start, you should have enough assets in Euros to meet your spending liabilities for a few years, and also there is no guarantee that Sterling or the US Dollar won’t fall more than the Euro. What you need to aim for, as much as possible, is diversification and flexibility.
When it comes to your savings and investments, you could diversify them over two or three currencies. Much depends on your individual circumstances, including whether you are likely to live in the Eurozone for the rest of your life, if there is any possibility that you will return to the UK and if you expect to leave an inheritance to heirs in the UK.
If you invest within an insurance bond, choose one which allows currency flexibility, so you can switch currencies if the need arises. If you are waiting to invest, you could invest now in Sterling and if, or when, the exchange rate improves, switch some to Euros then.
The same goes for your UK private pension funds. If you were to, for example, transfer them into a QROPS (Qualifying Recognised Overseas Pension Scheme), this allows you to choose the currency for the underlying funds and the income.
You can usually set it up in Sterling and switch to Euros later, or, if it is in Euros, have the option to convert to Sterling at a later date if your circumstances (or the fate of the Euro) change.
However, you should keep in mind the fact that, exchange rate movements may affect the value of your funds.
There are testing times ahead for the Euro. What happens to it is out of your control, but you can usually control your choice of savings, investment and pension structures so as to give yourself currency diversification and flexibility.
Ask an experienced international wealth manager like Blevins Franks for advice.
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