Divorce in the euro zone

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  • #52849
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    mike
    Participant

    http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/04/30/ccview30.xml

    I thought this an interesting article. It suggests that there are a number of scenarios in which the euro could collapse. If they lower rates to help the Latin countries then Germany, with a strong aversion to inflation given their history of it, could leave the euro. Meanwhile if the ECB raises rates Spain, Italy and Greece may have no alternative but to leave or their economies will be devastated. The article suggests that France will leave at the first sign of any difficulty 🙄

    But if the euro did collapse would that make the pound stronger as it would be seen as a safe haven during the turbulence to come and so make Spanish property more affordable for the British? It’s all very confusing and very interesting.

  • #71625
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    katy
    Spectator

    Interesting 🙂 Think it would make the pound stronger as it is fairly strong against the euro now. The euro has never been very popular, know the spanish don’t like it (even many of the larger co’s still quote peseta value on official invoices!) and when my gardener works out the bill he begins in pesetas and converts! The Germans aren’t happy with it too.

  • #71626
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    Anonymous
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    Mike

    interest/exchange rates and the whole macro economic back drop they function in is very complex at the moment. In many ways we are in uncharted territory and there are great risks, beyond the control of central bankers and govenments.

    For two years now I’ve been saying it’s a great time to pay down and or restructure debt. I think the 10 year mortgages at fixed i/r of sub 5% that were available in the UK a couple of years ago, will prove to be a port in the comming storm.

    I think i/r in the US will start to come down later this year (but that will not stop the property crash over there, as that has other causes, and the course is firmly set).

    UK rates have at least 2 more .25% rises to go and possibly more. I have no doubt a lot of streched 1st, 2nd and BTL ‘investors’ will default/ bail out of the market and this will have a ripple effect across the whole UK market as sentiment turns negative.

    The Euro zone is good for a couple more rises in i/r. One size never was going to fit all and I would add Ireland to your list of ‘mediterranean’ states that will struggle with rising i/r.

    It shows what a mess we’ve all got into when i/r that are still low by historicall standards may cause real problems for so many!

  • #71629
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    Anonymous
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    I think interest rates will nudge slightly higher and then start falling next year. We haven’t seen the impact of the recent rate rises yet and anything more than .25 / .5% will panic the markets. The other problem is that fuel prices are falling but not being passed on to consumers. (One of the UK power companies – I think NPower – is actually owned by Spain!). Looks like the regulators need to be given bigger teeth. It is still predicted that inflation will fall to 2% next year in the UK. The pound is too strong at the moment and needs to weaken against other currencies.

    With careful economic management / strategies this latest house price scare may just blow itself out!

  • #71630
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    Anonymous
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    maximus, So your reading of it is that 12 months from now, all will be fine again?
    Interest rates only slightly nudging upwards, inflation at 2%, you are not PR for the next PM are you?
    It is a pity that the business world cannot see what you can. What about the commercialy property market in UK next year?
    Who will pay for the empty rates?
    Surely this will be passed on to the tenants, which in turn will be passed on to their customers and if that is the case, it is the consumer that pays eventually.
    Or do you feel that the investors in such properties are prepared to take the hit themselves?

  • #71634
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    mike
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    @pablo Silver or Lead? wrote:

    Mike
    interest/exchange rates and the whole macro economic back drop they function in is very complex at the moment. In many ways we are in uncharted territory and there are great risks, beyond the control of central bankers and govenments.

    I wish I understood economics better but so far I’m happy with my gut feeling.

    @pablo Silver or Lead? wrote:

    For two years now I’ve been saying it’s a great time to pay down and or restructure debt.

    It’s two years ago that my guts started giving signals. It was when the oil price first reached $60 a barrel and no one showed the slightest interest. It didn’t affect the market but I felt it deserved attention from serious investors but there was not a flicker of interest from anybody, they just kept repeating the same mantra, you can’t lose with property.

    @pablo Silver or Lead? wrote:

    I think i/r in the US will start to come down later this year (but that will not stop the property crash over there, as that has other causes, and the course is firmly set).

    I read today that they have a long term pension and medicare finance problem which they will have to address some time soon. This will mean more money going into that sector of the economy either through taxation or personal pension/medical care contributions and less money for consumption.

    @pablo Silver or Lead? wrote:

    UK rates have at least 2 more .25% rises to go and possibly more. I have no doubt a lot of streched 1st, 2nd and BTL ‘investors’ will default/ bail out of the market and this will have a ripple effect across the whole UK market as sentiment turns negative.

    The markets seem to expect an extra interest rate rise but I don’t know why. From what I have read there will be some items that rose unexpectedly last year coming out of the figures in the summer. Do you have any thoughts on that?

    Many professional BTL landlords in the UK haven’t been buying for the past couple of years as amateurs bid everything up to what they consider ridiculous prices. Half of the apartments in UK cities are unoccupied either because they have been bought as a BTL and the owner can’t find anyone to rent at the price they want or have been bought simply as an investment to be sold when they have gained their owner a tidy sum in capital appreciation.

    @pablo Silver or Lead? wrote:

    The Euro zone is good for a couple more rises in i/r. One size never was going to fit all and I would add Ireland to your list of ‘mediterranean’ states that will struggle with rising i/r.

    Yes. My sister has bought over there but thankfully they don’t have a mortgage to maintain. My brother in law was telling me that the amount of debt they have in Ireland makes the English look prudent.

    @pablo Silver or Lead? wrote:

    It shows what a mess we’ve all got into when i/r that are still low by historicall standards may cause real problems for so many!

    Oh yes! Someone elsewhere was pointing out that low inflation is the historical norm and he’s right, but I think that collectively we’ve been acting with the mindset of people used to high inflation.

  • #71643
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    Anonymous
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    It seems a natural progression that people who can remortgage, buy to let, then after making a few quid, they call themselves a property investor and see it as an easy way to make money. The outcome is then “Many professional BTL landlords in the UK haven’t been buying for the past couple of years as amateurs bid everything up to what they consider ridiculous prices.”
    It also seems that “their” progression is then into the commercial market, which also has resulted in Many professional investors in the UK haven’t been buying for the past couple of years as amateurs bid everything up to what they consider ridiculous prices.
    What then happens is there is a hiccup, the amateurs or the new pros start running, the banks want their money and the professional investors are left to cherry pick. Good times ahead.

  • #71644
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    Anonymous
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    Well the theory goes as follows.

    Interest rates rise, confidence in the property market drops. As a result in falling confidence, less people want to buy, and more people rent. Prices for property falls, but rentals increase (as more people prefer to rent rather than buy). Smart BTL investors buy more property at below market value and rent out.

    As confidence returns property prices rise, and rentals decline. Smart BTL investors stop buying property and accept rentals that just cover costs, but basque in the warm glow of capital gains.

    Now the buggers muddle here is the BTL investor who is so over committed that they can’t ride out interest rate rises. This leads to many baling out with burned fingers. And guess who buys their property at below market value, yep, the smart BTL investor.

    Now the moral to all of this is quite sobering. As a BTL investor, you may be lucky to enter the market at the right time with zero or little capital, but then again you may also be caught out. In my humble opinion, you can’t enter the BTL market without substantial capital behind you. The problem of course is all the slick seminars running in the UK promising untold BTL riches for no money down.

    At the end of the day, money makes more money.

    Kevin

  • #71649
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    katy
    Spectator

    And at the end of the day a lot of people who think they are smart often get their fingers burnt because if they are clever enough to predict the market they wouldn’t be trying to impress on here.

  • #71650
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    Anonymous
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    @katy wrote:

    And at the end of the day a lot of people who think they are smart often get their fingers burnt because if they are clever enough to predict the market they wouldn’t be trying to impress on here.

    Predicting the market is easy, anybody can do it. Predicting it correctly is the difficult bit. Having said that, there are some pretty good pointers that can help. Supply versus demand, population changes, interest rates, employment statistics etc etc.

    Kevin

  • #71651
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    Anonymous
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    mg wrote:
    What then happens is there is a hiccup, the amateurs or the new pros start running, the banks want their money and the professional investors are left to cherry pick. Good times ahead.

    The problems in UK is that the pensions are a joke and many people are trying to find a way to increase they retirement money. And BTL appeared to be one of those. But then the same happened in 1998-2000 when a lot of amateurs entered the stock market and got badly burned.
    The amateur BTL will be the ones holding the bags.

    Unfortunately, I expect that the situation will be more complex now as the banks will take a big loss and the stock market which bought the sub-prime loans will also get hit.

    In USA it seems that the SEnate wants the tax payer to bail out the studpid people who bouth at high prices with funny money, do you think that in Spain or UK something like that might happen?

  • #71652
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    @ralita wrote:

    @mg wrote:
    What then happens is there is a hiccup, the amateurs or the new pros start running, the banks want their money and the professional investors are left to cherry pick. Good times ahead.

    The problems in UK is that the pensions are a joke and many people are trying to find a way to increase they retirement money. And BTL appeared to be one of those. But then the same happened in 1998-2000 when a lot of amateurs entered the stock market and got badly burned.
    The amateur BTL will be the ones holding the bags.

    Unfortunately, I expect that the situation will be more complex now as the banks will take a big loss and the stock market which bought the sub-prime loans will also get hit.

    In USA it seems that the SEnate wants the tax payer to bail out the studpid people who bouth at high prices with funny money, do you think that in Spain or UK something like that might happen?

    I am struggling to establish a link between the “stock market” and “sub prime loans”. Yes some UK banks are exposed to the sub-prime lending market, but not excessivly so. Please explain this comment.

    Also, what is “funny money”?

    On a historical basis, the UK stock market is as cheap as it has ever been to invest in. In terms of share price versus earnings (P/E ratio) there has never been a better time to invest.

    UK property is also underpinned by some sound financial fundamentals. We just can’t build enough houses to meet the demand from immigration and the trend towards smaller households. We physically do have enough building land (as opposed to countryside) to support the demand. Yes there is a problem with afordability in the UK, and this will cause the market to pause and catch its breath.

    The key to investing in the stock market or property is to take a long term view. Neither should be seen as a way to get rich quick.

    Kevin

  • #71653
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    mike
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    @katy wrote:

    And at the end of the day a lot of people who think they are smart often get their fingers burnt because if they are clever enough to predict the market they wouldn’t be trying to impress on here.

    I think you made a good point there, Katy. I don’t think that anyone who bought in the past couple of years is claiming to be smart here and are noticeable by their absence

  • #71654
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    mike
    Participant

    OK

  • #71655
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    Anonymous
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    kpw4v wrote:
    ralita wrote:
    mg wrote:
    What then happens is there is a hiccup, the amateurs or the new pros start running, the banks want their money and the professional investors are left to cherry pick. Good times ahead.

    The problems in UK is that the pensions are a joke and many people are trying to find a way to increase they retirement money. And BTL appeared to be one of those. But then the same happened in 1998-2000 when a lot of amateurs entered the stock market and got badly burned.
    The amateur BTL will be the ones holding the bags.

    Unfortunately, I expect that the situation will be more complex now as the banks will take a big loss and the stock market which bought the sub-prime loans will also get hit.

    In USA it seems that the SEnate wants the tax payer to bail out the studpid people who bouth at high prices with funny money, do you think that in Spain or UK something like that might happen?

    I am struggling to establish a link between the “stock market” and “sub prime loans”. Yes some UK banks are exposed to the sub-prime lending market, but not excessivly so. Please explain this comment.

    Also, what is “funny money”?

    On a historical basis, the UK stock market is as cheap as it has ever been to invest in. In terms of share price versus earnings (P/E ratio) there has never been a better time to invest.

    UK property is also underpinned by some sound financial fundamentals. We just can’t build enough houses to meet the demand from immigration and the trend towards smaller households. We physically do have enough building land (as opposed to countryside) to support the demand. Yes there is a problem with afordability in the UK, and this will cause the market to pause and catch its breath.

    Kevin

    I know about the situation in USA. People bought houses with Adjustable MOrtgages, which were then sold by the banks to investors. Now, the mortgage adjust and the mortgage rates goes up by say $500/month and the owner forecloses the property. The bank tries to short sell or to sell the foreclose property. This is when both the bak and the investor lose money.

    I do not know how it is in UK, I bought my house in 2005 with 30% down and a 15 year regular mortgage.

    But I know that in Canary Islands I was offered many 100% mortgage with stated income and also 110%-120% mortgage due to the high assessed value of the apartment/house. Aren’t these mortgages sub-prime ones?

  • #71656
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    Anonymous
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    Kevin

    You wrote that

    “UK property is also underpinned by some sound financial fundamentals.”

    With fundimental such as:-

    1. Current market prices x average earning multiples off the normal scale.

    2. Market prices (for many properties bought over the last 3 years for BTL) making rental yield (net of all costs) negative.

    3. With real general inflation running at arround 4.5 to 5.5% and wage inflation lagging this massively.

    4. With many UK buyers churning of mortgage rates of 2 to 3% only to find the landscape of today very differant from the last 5 years (many are refixing at todays rates of 5 to 5.5% (rather than go onto higher SVR’s) an increase in payments in some cases of 50% +).

    5. A background of rising mortgage rates and credit tighteing following increasing bad debt due to lax lending criteria of the last 5 years.

    What “sound financial fundamentals” are you refering to?

    Pablo Silver or Lead?

  • #71657
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    @pablo Silver or Lead? wrote:

    Kevin

    You wrote that

    “UK property is also underpinned by some sound financial fundamentals.”

    With fundimental such as:-

    1. Current market prices x average earning multiples off the normal scale.

    2. Market prices (for many properties bought over the last 3 years for BTL) making rental yield (net of all costs) negative.

    3. With real general inflation running at arround 4.5 to 5.5% and wage inflation lagging this massively.

    4. With many UK buyers churning of mortgage rates of 2 to 3% only to find the landscape of today very differant from the last 5 years (many are refixing at todays rates of 5 to 5.5% (rather than go onto higher SVR’s) an increase in payments in some cases of 50% +).

    5. A background of rising mortgage rates and credit tighteing following increasing bad debt due to lax lending criteria of the last 5 years.

    What “sound financial fundamentals” are you refering to?

    Pablo Silver or Lead?

    I stated in my post that affordability is currently or very soon will be an issue, all the points you make are valid and support my view. However, the afordability issues (in my opinion) will cause the UK market to pause and catch its breath and not crash.

    The sound fundamentals of the UK market include:

    1) Not enough building land
    2) Increasing population (living longer, immigration)
    3) Trend to smaller households due to divorce/separation etc.
    4) A relatively well trusted legal system
    5) A well established mortgage market, which protects its own backside and will only lend on the true value of a property. Whether the borrower can afford it is another matter.

    All of which equates to demand outstripping supply.

    The long term fundamental picture for UK property is good (as is the stock market).

    The same can’t be said for the Spannish property market. The short, medium and long term prospects are poor in my opinion. As long as supply is outstripping demand due to over development backed up by a corrupt system, then it will never be a sound investment, imho.

    Kevin

  • #71659
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    Anonymous
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    Kevin

    Many of the reasons you give are supply/demand ‘market’ as opposed to sound ‘financial’ fundamentals. I’m not being pedadantic, in fact the opposite. The Uk market for several years now had increasingly stretched financial fundamentals, in fact stretched so far from ‘long term trends’ that a correction/crash is much more probable than a levelling off/soft landing that many are hopping for.

    Let’s look at a few different markets.

    Japan has less land (that can be built on) per capita than the UK and most if not all your other criteria, its prices fell for 15 to 16 years.

    USA. Now that’s an interesting one. The increase in interest rates from 1 to 5% and the collapse of the sub prime sector, are not the main reason for the problems (that really are only getting started there).

    Although the fed took rates down to 1% mortgages for 90 to 95% of the US market were the same old tried and teaser 5 to 6% 25 to 35 year repayment that dad would recognise. So the toxic sub prime, low rate teaser mortgages only affect a small area of the whole market. So for the vast vast majority of US buyers there has been little change.

    What really spooked the market was a huge change in sentiment when Mr and Mrs Alt-A good credit (mainly under 40 years of age) realised that their condo, investment, and 2nd home actually can and is going down not up = lots of new sellers hardly any new buyers.

    Spain, well I think many of us know where that’s going both the Brit Costas, general property market and economy, are in for a seismic readjustment. Spain was a poor rural country that is now heavily indebted and has an imbalanced economy. Who now being a ‘rich’ country are going to have to become a net contributor to the EU (ironically to place like Bulgaria where unscrupulous Brits and the Bulgarian mafia can fleece even more Brits).

    The UK, just before the last crash all your sound fundamentals of the UK market outlined below were trotted out as to why the market would not crash, but soft land.

    1) Not enough building land
    2) Increasing population (living longer, immigration)
    3) Trend to smaller households due to divorce/separation etc.
    4) A relatively well trusted legal system
    5) A well established mortgage market, which protects its own backside and will only lend on the true value of a property. Whether the borrower can afford it is another matter.

    It is different this time and there are reasons to believe it could be worse. This time property inflation has really affected the whole country and ‘financial’ fundamentals have never been so stretched. This time many more 1st homes have been re-borrowed against to fund BTL’s (and ever more expensive lifestyles) , many BTL’s bought in the last 3 years aren’t cash flow positive, but still they buyt more, banking on a never ending round of capital appreciation. It remains to be seen As the News from the US, Spain and Ireland goes from bad to worse over the next few years, how sentiment in the UK changes. Demand can disappear over night. I for one would no be surprised if over a 3 to 5 year period prices didn’t come down on average 15 to 20%. That of course being an average, which means just like last time a lot of places fall 50%, but we’ll see.

    Oh yeh back to the stresses in the Euro zone, yep they’ll be plenty. How that affects the £-E-$, I’ve no idea!

  • #71663
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    mg,

    maximus, So your reading of it is that 12 months from now, all will be fine again?
    Interest rates only slightly nudging upwards, inflation at 2%, you are not PR for the next PM are you?

    For the UK, yes probably will be fine. With respect to Spain / Greece (and to some extent those countries under the Euro) no. Their fundamentals are different and they do not have the capacity to change their exchange rates to control inflation. Look at Germany – in danger of rampant inflation even though they believed under the Euro this would not happen. This could signal the end of the Euro. These countries are in danger of experiencing their own ‘Black Wednesday’

    As for PR to PM are we talking Gordon or David? 🙂

  • #71665
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    Anonymous
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    Didn’t know there was an election to choose the next PM and it seems that your comments are similar to the hyp put out by the next PM.
    I am pleased that you consider “For the UK, yes probably will be fine”, but hope that you will not be offended if I do not act on that opinion or judgement and that I will go with the flow of the property market (commercial) which expresses great concern for the next 12 to 18 months.
    Tell me, when was the last time you witnessed retail premises on rent review arbitrations, returning a 0% increase, and with a Plc covenant?

  • #71666
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    mike
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    @katy wrote:

    And at the end of the day a lot of people who think they are smart often get their fingers burnt because if they are clever enough to predict the market they wouldn’t be trying to impress on here.

    I love the internet, it’s where most of my discussions take place because it’s so hard to meet people who truly want to discuss a subject in real life. Most, I find, want to impress that they are “up to date” with current thinking. Unfortunately that can lead to herd like behaviour with everyone reinforcing each other’s belief and anyone thinking otherwise being derided. It’s called groupthink and it can be very powerful.

    If you could have the same conversation in the pub as you can online what would be the point in coming online? Surely we should all stick our necks out, say what we think and then hear others opinions hoping that they give a new insight. It’s debate and it’s good. Sure there will be some who try to divert the debate or who only want to impress but as adults I’m sure we can recognise that and ignore the chaff and make use of the wheat.

    At the end of the day we are discussing investments and money. And God knows it was nigh on impossible to discuss these matters in Spanish bars. Believe me, I tried

  • #71667
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    mike
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    @pablo Silver or Lead? wrote:

    5. A background of rising mortgage rates and credit tighteing following increasing bad debt due to lax lending criteria of the last 5 years.

    Pablo Silver or Lead?

    I know of a person who has moved and because he didn’t get the price he wanted for the house he was leaving he decided to keep it and sell it when buyers will pay what he expects. That means he now has two significant mortgages. I have heard a few anecdotes of this kind of investment.

  • #71674
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    Anonymous
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    mg,

    Tell me, when was the last time you witnessed retail premises on rent review arbitrations, returning a 0% increase, and with a Plc covenant?

    Not sure what this means mg, could you evaluate further? Is this an expression of business confidence?

  • #71677
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    Anonymous
    Participant

    When a commercial premises (retail in this instance) is let by way of lease, there is a rent review pattern built into the contract, whereby each review (say 3 or 5 years) the rent is reviewed and normally with an upwards only clause. The new rent is usually based on comparables of similar properties in the area, and led by property prices and trading figures. In recent months, several instances have been reported where national retailers facing rent reviews have disputed the landlord’s surveyor valuation and at arbitration, the direction was that there should be no increase in the rent (couldn’t be reduced because of upwards only clause).
    This reflects the property market, rent and trading, therefore, things are not particularly good, when only 12 months ago, a 25% increase on a 3 year pattern was being achieved.

  • #71698
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    Anonymous
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    @katy wrote:

    Interesting 🙂 Think it would make the pound stronger as it is fairly strong against the euro now. The euro has never been very popular, know the spanish don’t like it (even many of the larger co’s still quote peseta value on official invoices!) and when my gardener works out the bill he begins in pesetas and converts! The Germans aren’t happy with it too.

    Yep Katie,
    over here nearly everything is STILL in pesetas as well as euros from price tags on clothes to house prices, car prices, supermarkets etc.

    Remember when you could pay in pesetas and get your change in euros?!
    Imagine it reversing!

    Lots of dodgy 50 euro notes around at the mo too.
    But not as bad as back in the days of the fake 2000 peseta notes – they were S O O O O bad!
    Wrong colour, wrong feel, even serial numbers scribbled out on one side of the note. But in the end, there were so many of them that even the cashpoints were giving them out and everywhere was accepting them!
    Ah….the good ol’ days!

  • #71710
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    Anonymous
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    Mg,

    If the rent revue is set at 0% surely good news. This means business’ don’t need to pass on the increase to the consumer so inflation falls and hence interest rates fall and house prices stabilize.

    A friend works in advertising. His business is a good predictor of economic growth because clients cut back first on their advertising budget. Equally, he knows when we are coming out of recession before others because demand for his services increases first. Two years ago he was worried. At the moment business is booming!

    Or am I missing something here?

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