Hedge your bets

As the European debt crisis goes from bad to worse, expats earning their crust in euros may well be pondering the future value and even existence of their base currency.

With polarised nationalist stances added to excessive brinkmanship, it is difficult to predict the euro’s future. Potential scenarios range from business as usual at one end of the spectrum to a complete collapse of the single European currency at the other, and from fewer core countries retaining the euro to the possibility that checking out of the Euro Club will not be an option. So, in such a period of uncertainty, what is the best way to handle savings and investments? With the euro relatively strong, should you reduce your exposure to a currency that may be worth far less in the future than it is now?

DAMNED IF YOU DO

The golden rule with currencies is aligning your assets and liabilities so that you save in the same currency that you earn and spend. Borrowers – from UK nationals with holiday homes in Cyprus to provincial French governments and homeowners in Hungary – have discovered that you ignore this rule at your peril. Before the current debt crisis, low interest rates and stable exchange rates made loans in Swiss francs seem attractive. The subsequent surge in the value of the Swiss franc has left many individuals and local governments with massive losses and much higher loan repayments. Of course, if you were to borrow in Swiss francs now, you might be looking at a significant profit at some point over the next few years.

DAMNED IF YOU DON’T

The era when the seven most powerful economies regularly convened to discuss international affairs is coming to an end. G7 members Britain, Canada, France and Italy are being overtaken by Brazil, China, India and Russia. This suggests that future investments should be adapted to reflect the changing economic order. It implies reducing exposure to eurozone countries and increasing exposure to the rapidly developing powerhouse economies of the future.

With investments, the solution to this dilemma is to use fund managers who are mandated to get returns for euro-based investors who are free to invest globally. Dynamic managers can adapt their portfolios according to global developments while never losing sight of the fact that their primary aim is to secure returns in euros. This means they can vary their exposure to the euro, increasing it when it looks set to strengthen and diversify into other currencies at times when the euro is likely to fall in value.

With cash savings, exposure to other currencies can make sense in an era of ‘financial repression’ when the government is pursuing policies to reduce the purchasing power of your money. The rationale for this approach is that weakening the value of the euro will bring down the real value of government debts to a manageable level. Of course, this will also shrink the real value of euro cash deposits too.

TIME TO ACT?

For a government to successfully debase its currency through a deliberate policy of keeping savings rates below the rate of inflation, it is important that savers and investors be prevented from switching to other currencies. This is where exchange controls can restrict the amount of money you can transfer out of your local currency. For these controls to be effective, they have to be announced suddenly and brought into effect immediately. So now might be the right time to review your currency exposure.