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Be flexible with currency

Uncertainty in the currency markets mean it is important that you diversity and do not put all eggs in one basket

OVER the last three years, the currency story for those living in France has all been about the pound and its fall from grace. It has lost around a third of its value against the euro and a fifth against the US dollar during this period.

But the focus now is on the euro, for which the outlook is looking more and more challenging. Weeks of uncertainty over Greece’s financial viability, not to mention concerns over the Spanish, Portuguese, Irish and even Italian economies, have plagued the euro.

Some analysts have even queried whether the single currency 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.

Greece’s precarious financial position, combined with uncertainty surrounding any rescue plans caused the euro to weaken sharply.

At the end of March Eurozone leaders reached an agreement, the finer details of which remain rather sketchy.

We do know, however, that the International Monetary Fund has agreed to fund around one-third of a €22 billion rescue package for Greece. It will only be used if Greece faces default and is unable to raise money from the capital markets. The aid will be subject to “robust” conditions and a high interest rate.

The agreement was welcome news after weeks of uncertainty and has almost certainly averted the risk of Greece’s illiquidity (ie. going bankrupt).

Traders bought the euro as a result, causing it to rise against both the dollar and the pound.

However analysts were sceptical about whether the short-term gains would last, because of the potential difficulties in delivering assistance to Greece.

It is not clear how the fund would be activated, and all the Eurozone states would need to agree before it is used, which is easier said than done. Greece could potentially need more help if its economy contracts more than expected, and the situation in some other countries, including Spain and Portugal, is yet to play out.

Greece may be just the tip of the iceberg.

With 16 different nations involved, there are both political and legal restraints to fixing the euro. The Eurozone will try to consolidate its fiscal position. Budget deficits need to be brought back to under 3% – but it is difficult to see how this can be done without some devaluation to the euro.

Then there is the question of whether IMF involvement could damage the euro’s reputation, as it could be viewed as a currency that needed international help to survive.

Most British expatriates holding assets in pounds and living in the Eurozone would be pleased to see a stronger pound and/or a weaker euro. It has always been the case that 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, for many British expatriates there is a tendency to retain a significant amount of assets in pounds, often including private pension arrangements (of course, the UK state pension is also payable in pounds) and, as a consequence, many expatriates living in France are subject to the vagaries of currency exchange rate movements.

For those selling property in France and returning to the UK the currency exchange rates are very favourable but for the majority of expatriates remaining in France the rates have made life considerably more costly, especially when added to current higher rates of inflation.

It is impossible to predict future currency movements with any certainty.

However, in my opinion, there is a strong possibility that the euro will weaken further in the short to medium term while these Eurozone problems exist.

I do not subscribe to the worst case scenario of the euro failing or of even one member state reverting to their original currency.

A recent report by economists at international financial services firm UBS asks whether it would have been better if some countries had never joined the euro. However the report concludes that a currency break-up is unlikely, as the costs would exceed the benefits.

Nonetheless, uncertainty about the fate of the euro may be around for some time to come.

In view of this, what can you do to protect your assets?

Swapping all your euros to pounds or another currency is not the answer, because you should still have enough assets in euros to meet your spending liabilities for a few years and there is no guarantee that the pound or the dollar will not end up falling more than the euro.

What you need to aim for is diversification and flexibility. When it comes to 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 (assurance vie in France) choose one which allows currency flexibility, so you can switch currencies if the need arises.

You could, for example, invest in pounds now and later switch to euros if and when the exchange rate improves.

The same goes for your UK private pension funds. If you were, for example, to transfer them into a Qrops (Qualifying Recognised Overseas Pension Scheme), this would allow you to choose the currency for the underlying funds and the income.

You can usually set it up in pounds and switch to euros later. Or, if it is in euros, have the option to convert to pounds at a later stage if your circumstances (or indeed the fate of the euro) change.

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.
You should ask a financial adviser if you need further help.

This column is written by Bill Blevins of Blevins Franks financial advice group ( who has written for the Sunday Times on overseas finance for the last 10 years. He also broadcasts regularly on BBC radio. This column is exclusive to Connexion.

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