Euro debt crisis: How it affects your finances

By Kate Saines

Being in the UK might feel like a safe haven during the Eurozone crisis. After all, we are not part of the Euro and even the turbulence in the stock markets can feel very remote to our everyday lives.

Yet, there is a knock-on effect of the spiralling Euro debt crisis which means anyone in the UK with a pension, any kind of investment (including an ISA), or even certain jobs could feel the tremors.

Here’s how.

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UK Exports

Let’s start with UK exports, of which 40 per cent are to the Eurozone, according to the Prime Minister, David Cameron. With so many of the UK’s key trading relationships in Europe, a failing Euro signals a threat to this stream of business.

The more European economies which go the same way as Greece and Ireland – the fewer opportunities the UK will have to trade. And with such a large bulk of custom and demand disappearing, this could impact greatly on jobs here in the UK.

Experts say this will particularly affect small to medium sized businesses, which are already suffering from the harsh economy. This area is probably the government’s greatest concern when it comes to the affect the Euro debt crisis is having on the UK because so much trading is to the Eurozone.

David Cameron admitted, in a BBC interview, because of these strong exports links, the UK could not shield itself from the crisis.

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UK Bank Exposure

European stock markets fell dramatically over the third financial quarter of this year.

French and German stocks have suffered falls of 25 per cent since the beginning of June and the UK’s FTSE has not escaped the downward trend, suffering its worst performance in a quarter since 2002.

How does this affect our banks? For starters, many of our big banks sell shares on the stock markets. So with buyers pulling out, banks are being deprived of funds through investors.

Meanwhile they have also been writing down debts from European countries like Greece. If this continues then these banks will have less money to lend to their customers – in other words individuals and businesses in the UK. This will of course affect mortgages and business loans.

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Pension and Annuity Rates

Many of our pension funds are invested in the stock markets, which means anyone with a pension is at risk from the current volatility.

It’s not a total catastrophe. Markets tend to rise over the long term and volatility, such as is being experienced at the moment, tends to be seen as just a blip in the ten to twenty-year period over which pension investments run.

If you are approaching retirement, however, the Eurozone crisis and the market turbulence it is causing may well have an impact on your annuity – this is the product you buy in order to take an income from your pension for your remaining years.

Annuity rates are impacted by the price of gilts (government bonds) and these are currently rising in price as investors turn to them as a safe-haven in times of volatility.

To cut a long story short, the insurance companies which provide annuities are reducing the income paid from these annuities. As such, a person retiring today will receive income which is 14 per cent lower than someone who bought their annuity at the start of the year, according to independent financial adviser, Hargreaves Lansdowne.

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Investment ISA rates

Millions of pounds are also invested in stocks and shares ISAs in the UK. And they are also being affected by the tumbling share prices.

Hargreaves Lansdowne’s figures show an ISA account worth £20,000 at the start of this year, would only be worth £17,556 if it is cashed in today. If you needed any further proof the markets were struggling, you need only look to the company results of some of the big high street names which are FTSE stalwarts.

Tesco, for example, has traditionally been a sterling performer – a relative safe haven in the world of stock market shares. But the supermarket is set to become another retail giant who will announce weaker results.

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How to tackle the crisis

David Cameron told the BBC that the government had a clear view of what needs to be done about the crisis.

He said Eurozone leaders must strengthen financial mechanisms, work with the International Monetary Fund (IMF) and deal with the high levels of sovereign debt.

Meanwhile, G20 leaders, the World Bank and the IMF, have formulated draft plans to rescue the Eurozone from its debt crisis which is likely – among other things – to involve writing off half of Greece’s debt.

Other proposed measures include increasing the size of the Eurozone bailout fund - the European Financial Stability Facility (EFSF) – to €2 trillion and recapitalising European banks. If all goes well, these plans should be finalised in time for a meeting of G20 leaders in France in November.

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