Rob's 10th guest post on Saving the Euro, in which he remembers the now defunct European Exchange Rate Mechanism of 1979.
Looks like a re-run of the ERM crisis in the early 90s
Anyone remember the ERM? - the forerunner of the Euro zone.
The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System (EMS), to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of a single currency, the euro, which took place on 1 January 1999.
-Wikipedia
Back in the early 90's the core group of nations that make up the Euro zone, including the UK at that time, operated a set of fixed exchange rate bands between the member countries.
A bit like the Euro today, it restricted the individual countries ability to influence their own import/export markets etc. by manipulating the exchange rate.
Pressure built up, and the speculators - the dreaded market - attacked each country in turn trying to take advantage of this inflexibility. In some instances, this forced the country concerned to raise short term interest rates to mind numbing levels to combat speculative sales of the currency - over 1,000% for overnight funds.
If the country didn't crumble they moved on to the next until they started on the UK.
On one day the markets went crazy - exchange rates were quoted with 500 point spreads (£/$ is usually quoted with about a 5 point spread) interest rates started to rise, and there were a number of "official" rate increases announced by the government to punish short sellers.
Pressure was too much for the government to bear, and once the markets had closed that evening they announced that the UK was pulling out of the ERM and all interest rate increases etc. were now cancelled.
A colleague, who had gone home to write his resignation letter, because he was sitting on a £3m loss, came in the next morning to a £400k profit......totally bonkers (I had to laugh when he said with a straight face that he was confident that his positions would come good - when I last spoke to him that fateful evening he was crying in to his 7 or 8th pint of beer.....).
The current crisis in the Euro zone has some startling similarities - the market is trying each country in turn, to find a chink in the armour.
Ireland first - they crumbled
Portugal and Spain - tried but they didn't break (yet)
Greece - they crumbled
Italy - doing their best to break them, but could they be the "UK" of this crisis - their economy is the 3rd largest in the Euro zone and 8th in the world - if they go, the whole pack of cards crumple.
Interest rates are going up in all the Euro zone countries being targeted, they cannot manage their own FX rates as all now using the Euro.
Spookily reminiscent of the early 90's ERM scenario, but the only difference is that they all had their own currencies to fall back on then.
The UK pulled out of the ERM, but as we were (and thankfully still are) GBP based we were able to survive, and some would say prosper for the next 10 years.
What would happen if Greece or Italy had to bail out of the Euro?
Absolute chaos in the global markets - the Euro zone never had a "Plan B" for withdrawing - the idea was that if you joined, you joined for life.
Greece and Italy have a short grace period to put their respective houses in order, but if we are still having the same conversation at year end, then 2012 is going to be a very turbulent year on the global markets, and irrespective of where you live or what you do you will be affected, and not in a good way.
__________
The author, Rob (not his real name), is a treasury manager at one of UK's largest charities.
No comments:
Post a Comment