The knock-on effects of Europe

Well, it is all about the Germans this week – negotiating cease fires in Ukraine and holding the key to any settlement with Greece over the current renewal of the bailout deal within the EU.

Ticking along in the background is deflation, negative interest rates and questions over what happens when everyone is trying to devalue their currency for economic gain.

What does this have to do with commercial mortgages you ask? Well, nothing directly, but there is clearly a macroeconomic effect from these global events that will have a knock-on to the direction of interest rates and the future prospects for the global and UK economy.

In turn, that will have an effect on both lenders’ and borrowers’ decisions on commercial finance.

Taking those points in turn it seems, sadly, that the ceasefire in Ukraine is not holding, and continuing casualties are being reported.

Clearly, this human suffering puts economic factors into perspective, but without any sign of progress, the sanctions against Russia will increase, and I can foresee more pressure being applied by the Americans as their stance becomes more hawkish.

This is also a neat lead-in to the ongoing travails of the Eurozone and the current negotiations with Greece over their bailout renewal. We are all familiar with the German position on fiscal and monetary rigour, but they have been increasingly at odds with their other Eurozone partners and the possibility of a damaging fracture is drawing closer.

As with Ukraine, the US are now beginning to apply their own political pressure as fears grow that problems in Europe will begin to drag down the global economy and derail the US recovery.

This is not the first time that the US has intervened with the EU, but there is a definite feeling now that the stakes have been raised and the outcome of these discussions could have repercussions for future outcomes in Portugal, Spain and Italy.

It appears that the political will and election mandate from the Greeks is to do something to halt the grinding depression of the last few years. The Germans have been backing away from their strict ideological approach in more recent times (noting the huge QE announcement more recently), but the Greeks are really looking for debt write-offs of quite significant proportions, and whether this can be stomached by the Germans (and equally sold to their electorate) remains to be seen.

While all this upheaval has been happening across the Eurozone, huge amounts of QE money from the world’s central banks has been looking for a home. It has previously caused some exchange rate issues for developing economies as ‘hot’ money came looking for better yields, and even in Europe, the weight of money finally broke the Swiss National Bank and they had to scrap the ceiling against the Euro.

Swiss base rates are now at -0.75 per cent and Danish rates at -0.5 per cent, as these two countries try to stop their competitive edge being eroded by a ballooning exchange rate.

This is a step into the unknown and the outcome of how low effective interest rates can go will be another interesting outcome.


Attributed to Robert Collins, Head of Commercial Lending at Brighstar Financial