Foreign Perspectives

Archive for the ‘Business’ Category

Nobody is openly calling it a depression but then it’s a difficult call to say whether you’re in a depression or not when you’re actually in the midst of one.

Aside from the obvious financial difficulties that a growing list of countries are finding themselves in, signs this time around are seemingly all around on the smaller scale too. The list of bankrupts seems to be growing although that’s not really a terribly reliable sign in these days of financial engineering.

What’s perhaps more obvious is the number of small shops gradually disappearing. The smaller shops are more dependent on the local economy than the large chain stores and they tend not to have a large financial cushion to help them ride through the bad times either. Indicative of this too is the rise in the number of charity shops which can operate through financial difficulties as they don’t pay their staff nor do they pay for their stock. Thus in difficult times, charity shops tend to replace small shops.

Slightly strangely in some ways is that the chip shops and home bakeries are closing up. Two different reasons are working here with the chip shops suffering as they’re popular as cheap food outlets and thus have a fall-off in trade when those at the bottom end of the income levels have to make cuts. To some extent that affects the home bakeries too but there’s also the element of their products being a bit of a treat and that “treat money” is in shorter supply these days.

Will we all look back on this period ten or fifteen years from now and call it a depression? Somehow I suspect that the answer to that will be yes and that there are even more difficult times lying ahead.

The basic problem that Greece seems to have is that it has never really properly adjusted from the days when it could devalue the Dracma every couple of years.

In such an environment, you don’t really need to worry too much about creating a real economy as you can always pull in more tourists by reducing the value of your currency every now and again. Since that hasn’t been an option for ten years, what they did instead was to borrow more and more money to balance the books until they reached the point when they could borrow no more.

The problem now is that they have no economy to generate the money required to repay all those loans and neither can they devalue to reduce the value of the loans. Instead, what’s going to happen is that they will have to have those loans renegotiated to reduce their value directly. Snag is that this just pushes the refinancing out to the organisations which provided the loans who in turn need to be refinanced. The bigger problem is the sheer scale of the loans which, built up over ten years, amount to a significant proportion of Germany’s GDP. Proposals to privatise the debt just relocate the problem.

The current refinancing is essentially just lending more money to allow them to make the debt repayments without fully recognising that the capital needs to be repaid too. That’s, naturally, where the problems are going to mount up.

And, of course, that’s just Greece with Spain, Italy, Portugal and Ireland not too far behind them.

I went for a job interview yesterday which was unusual in that, whilst I felt that I did meet the requirements for the job on the whole, I didn’t fulfil all their essential requirements. So, I shouldn’t have been asked for the interview.

The snag is that, as with many other employers at the moment, these guys basically wrote a wish list rather than a list of requirements that anybody they could expect to recruit would actually possess. Not quite in the same league as one notorious job advert a few years back which had as an essential requirement a minimum of 5 years experience in using a particular version of software that had only been released the year before, but certainly getting there. That wish-list approach is one reason why it’s best to apply for a job that you like the sound of but which you feel you can only do a small fraction of: employers have been known to get a zero response from some job adverts these days as a consequence of that wish-list mentality.

For example, they asked for experience of a product that was written by a company who have since gone bankrupt and which seems to be mainly used in a different continent. I’m guessing that the number of people who could cover that will be quite limited and indeed the acknowledged local expert is returning to Canada later this year.

Other things had an air of inconsistency about them. Things like an essential requirement of experience in a product that is long past its heyday whilst also having a complete knowledge of the latest of technologies.

One question was particularly interesting in that they reckoned that the team would largely be made up of people in their 20s who would be “very sharp and know all the latest software” so how would I deal with that. Actually, chances are that I’d be even more up to date than they are since, as y’all know, I’m in the midst of a university IT course. It’s been a long time since I met anyone who could talk me under the table in terms of computer technology and even then it was a telecoms guy and they don’t count.

Oh well, I guess I better keep at the job applications.

For the most part, the relative valuation of currencies isn’t something that affects day to day life for most people.

After all, outside holidays, how often do you directly buy something from overseas? Even with Internet sales sites as numerous as they are, in reality most people buy from their closest outlet for the simple reason that to do otherwise would add to the shipping costs. Even when that’s not so much the case it needs a major price disparity to make it worthwhile shipping internationally for most products.

However, that all changes when it’s a major transaction such as a house. Which is why we find ourselves wonder just what’s going to happen to the sterling/euro rate over the next six months or so.

Frankly, most ways of predicting the future direction of exchange rates are little more than gambling. However, looking at it historically the rate has been between 1.50€ to about 1.05€ over the last five years and around 1.10€ to 1.25€ over the last year. Perhaps more importantly though is that the Euro is clearly overvalued a lot. For example, the Big Mac Index puts the over-valuation at 30% (ie the 1.50€ from getting on for five year ago is the right one); the problem is that it can take a long time before a currency reaches its correct exchange rate, however one might define that.

So what’s a person to do?

In practice most people do nothing which leaves them wide-open to what can be massive exchange rate differences. For example, that 15% change over the last year might not sound like much but translate that into a house price of, say, 200,000€ and you could be looking at a change of around 30,000€ which isn’t small change obviously.

Second choice is to translate the prices into your own currency at the current rate and build that into the sale contract. A reasonable option for you, if you can convince the other party into running with it. Chances are that in reality this is going to be a non-runner.

Finally, there’s the option of using one of the currency exchange places and fixing the exchange rate in advance. There are a whole lot of options with this route but the principle differences are between committing yourself to buy/sell at the rate quoted and getting an option to buy/sell at that rate. It’s much, much better to run with the option as, of course, the exchange rate could move in your favour. With an option, you can change your mind and exchange at the better rate.

When the Economist mentions something in several different articles it’s a pretty good bet that the something is in big trouble.

Last week they opened with a potted summary of the emergency support fund being set up by the Euro zone governments in an effort to patch up the radically different speeds which they’re running at. Then there was the leader urging leaders to forget about the option of breaking up the Euro and how dire it would be for a time. Finally, there was the briefing going through how it would be done and how difficult it would be to do.

The problem with the emergency fund being explicitly set up is that everyone knows just how much money is in the kitty. That’s sure to prompt some people to stretch that kitty to the limit whether they be speculators or governments wishing that they could just devalue.

Listing the processes necessary to recreate an old currency is frankly just asking for trouble. As they point out, doing so would cause massive upheaval in the financial markets lasting years and knock-on consequences of the real economy in the country doing it internally and through difficulties in trading with other countries during the change-over period. Unfortunately, those countries are already facing years of upheaval and austerity budgets and moreover their country’s finances will be run by un-elected officials from other countries during that period. Wouldn’t the upheaval in recreating their own currencies be worth it for them? At least they’d be able to have a real say in how their budget was run.

One of the major problems they foresee is the logistics of printing the new currency in secrecy. Unfortunately, there is one Euro zone country that doesn’t need to do that. Ireland’s banks already print sterling notes and one, relatively doable, option would be simply for Ireland to revert to their former linked currency explicitly, at least for a while.

So, will it be Ireland that will pull out first? Whoever it is, they seem unlikely to be the last.