Greece, The Euro And The Foreign Exchange Markets
I should definitely be paid for this. In a recent comment for another publication I suggested that the North European States would ultimately fall into line and agree to bailout the PIGS. Pay me in any currency, just not in Euros.
The thinking was that the whole European Union project is essentially political, rather than economic. Therefore, it is unlikely to be run in the most fiscally sensible manner.
Lo and behold, we have now seen that the Germans have effectively given in and promised to sign the cheque.
A rebound in the EUR/USD spread was one immediate reaction, however, in the belief of this commentator, the rebound was very short sighted.
In the long term, the European currency would be better off if the North European States started playing hard ball with the profligate South and, if required, actually ejected non-compliant member states.
We shall now see the Eurozone commit to throwing good money after bad, if so, this is likely to work to the detriment of the currency as a whole.
The squeeze on short forex positions may have had an immediate impact, which may go on for a while. Nevertheless, the fact is that the Greek budget proposals are fairly weak and do not go far enough towards a solution to the overall problem.
In fact they are much less strict than the budget proposals from the Irish and nobody was rushing to the aid of the Emerald Isle.
The result will be that more money will be printed – yet another politically generated solution to an economic problem.
This printing of money is likely to commit the Northern States to spending more than they should. It also comes on top of all the other various calls and commitments on Treasury purses that the last couple of years have seen.
At the same time, we have also seen the ill informed proposal of a Robin Hood tax from various â€˜interested parties’.
It is always interesting how keen people are to promote a Tax which they believe will not personally affect them. Especially when it will be forced on people they don’t like very much anyway.
The proposed tax of 0.05% sounds very small and, in order to portray its limited impact, the often used example is that it would mean merely 5p on a Â£1,000 transaction.
Unfortunately this merely shows the ignorance of such people to the sums actually involved in financial transactions.
Forex trading is carried out in millions, not thousands. The cost of a Â£1m GBP/USD transaction, for example, is currently around to in total. This is split between the platform provider, the broker and the clearer etc.
To add another 0.05% on this would mean an extra Â£50, or at current exchange rates. This is at least five times more expensive than the current total cost of the whole deal and would be in addition to the other fees.
If campaigners truly believe that the foreign exchange market will stand by and accept such an increase in costs then they are likely to be disappointed.
In my opinion, the entire market will simply move to whichever jurisdiction does not impose the tax. And you can bet your bottom Dollar that many countries won’t employ the Robin Hood tax for precisely this reason.
Daniel Jones is a seasoned spread trading professional and commentator on some of the leading financial spread betting sites.