The euro impact on pensions

Euro impact on pensions

Will the value of the Euro impact on pensions? Until now, it has been taken for granted that a euro is a euro, wherever it is held in the Eurozone. However, many individuals, companies, and banks are beginning to question this assumption. The change of heart has become ever more visible in Greece where:

  • There appears to be a steady leak of money from Greek cash deposits
  • Companies such as Vodafone are reportedly limiting the amount of operating cash they hold in Greece overnight
  • Stories are circulating of restaurants that refuse to take credit cards, insisting on cash-only payment

If you gaze into the abyss, the abyss gazes also into you.…

Whilst politicians treat austerity as an academic exercise across Europe, the results on the ground are somewhat different. With wages and pensions stagnating, it looks increasingly unlikely that confidence in the market will return any time soon. Although Greece has committed to reform measures imposed upon it by the EU, any agreement is likely to be reversed in April 2012 when a new general election is scheduled. The odds are still 50 / 50 that Greece will leave the Euro.

Will the medicine kill the patient?

This new bailout could have the adverse effect of throwing the country into a tailspin of both recession and debt. For all intents and purposes, the bailout is a default; it may not be disorderly, but it is a form of default all the same. Greece may eventually decide that the only alternative to more austerity is to exit the Euro. Should this happen, the government will likely reinstate the drachma as the national currency, with the markets forcing a devaluation of up to 50%, therein wiping out the wealth of the middle classes. Such a drastic fall in the value of the currency may make exports look attractive and boost growth prospects over the short term; it could also result in the imposition of exchange controls on the country’s banks to prevent mass cash withdrawals.

The Euro impact on pensions and savings

The burden of the new deal will be carried by the Greeks themselves and the private sector, including pension funds that were forced to invest in Greek bonds and have now suffered a 70% writedown on their investment. The key issue for investors is the ability of the Euro to get back to ‘business as usual’ should Greece leave the single currency. But what if the contagion were to spread beyond the euro-zone firewall provided by the ECB and IMF funding? Portugal, Italy, and Spain would come under intense pressure from investors wary about the risk of another victim. This could lead to a run on the Euro and have damaging consequences for pensions and savings. The fate of the single currency now seems like a game of chance.

Just ask yourself …do I feel lucky?!

Des Cooney: Des Cooney is a renowned International Pensions expert with over 27 years experience in pension and wealth management. His main specialty is in the transfer of UK pensions to QROPS and International SIPPs.