The Northern Crock effect.jpg

The Northern Crock effect


Currency Dealer, Halo Financial Ltd.

[email protected]

UNTIL MID September, you could be forgiven for thinking that Northern Rock was a niche music genre or maybe a trendy cider served with ice and you may not have guessed it was a financial institution.

I would bet fewer still would have thought that this UK mortgage provider, the fifth largest in the country, would be the catalyst to wipe 3.4 percent off the value of Sterling against the Euro and bring the woes of the UK economy on to the front pages of every newspaper.

The oddest thing is that it looks as though Northern Rock was acting in a pre-emptive and judicious manner in effectively asking the Bank of England for an extended overdraft while the interbank lending market was so tight.

Lax lending

Their whole business model revolves around borrowing from interbank lenders and lending those funds on to mortgages. Were it not for some pretty lax lending in the US resulting in higher levels of default, the banks would still be lending to each other and Northern Rock would still be the darling of the market.

In spite of all the logic, once the newspapers had their hands on the story, things – to use the common parlance – ‘really kicked off’ and the prospects for Northern Rock and the Bank of England calming things down without a fight were pretty remote. Cue the unedifying pictures of queues of investors outside Northern Rock’s offices waiting to grab their cash and cue the rapid decline in the Pound.

Away from the nitty-gritty of the ‘credit crisis’, ‘credit crunch’ or ‘cash crisis’ dependent on a newspaper editor’s alliterative preference, the market impact was one of Sterling sales. Against the Euro, Sterling fell from 1.48 to 1.43 in a matter of three working days and at the time of writing, that doesn’t look like it is at all finished. Sterling also lost three cents against the US dollar and four and five per cent against the high yielding New Zealand and Australian dollars, respectively.

Future unclear

This is one of the most volatile periods in the markets in living memory and the long-term effect is still unclear. Sterling could well continue to slide, no one knows whether other lenders are caught up in the same problems that Northern Rock found itself in and no one can predict when banks will start to lend to each other again. We will certainly need to see a calming of investor fears and perhaps a few more weeks of increased liquidity in the credit markets before any degree of normality can return.

While we wait, everyone is very nervous of any new risk revelations among other banks and/or institutions and that nervousness is what may well keep Sterling on the back foot. So if you have funds in Sterling which you want to convert into other currencies, timing will be more important than ever. I would urge the use of automated orders to make the most of the evident volatility and I would urge the use of a specialist to keep you up to date in a market which can change direction faster than an American with no income can get a mortgage … and believe me, that is pretty quick.

David is a Currency Dealer with Halo Financial Ltd, delivering competitive exchange rates and a personalised service to help property investors, holiday buyers and migrants  throughout Europe save time, money and hassle on their foreign exchange transactions.

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