Newsletter article

Currency Report - May 2013

Enthusiasm among Croatians for the European parliament is apparently at an
even lower ebb than it is in Britain and they aren't even members of the
union yet. Two and a half months ahead of Croatia's accession to the EU the
country went to the polls to select the folk who will represent them in
Brussels, Luxembourg and Strasbourg. EP elections seldom generate a strong
voter turnout. It is typically under 50% except in Luxembourg and Belgium
where voting is compulsory. April's ballot in Croatia brought out just a
fifth of the electorate, the third-lowest-ever rate of participation
(Slovakians take even less interest and hold the first two slots at 17% and
19.6%). But never mind. Croatia will have a year to consider the performance
of its representatives before they have to submit themselves to re-election
in the EU-wide election next May.

The anaemic turnout will surely have had something to do with the steady
diet of Eurocrisis news fed to the electorate over the last couple of years.
The most recent ones relate to Italy, where these is still no government a
month and a half after an inconclusive general election, and Cyprus, where
the bailout became a "bailin" with the confiscation of bank deposits, the
demolition of the country's finance industry, the imposition of capital and
exchange controls and the demand that Cyprus sell off its "excess" gold

That last stipulation is blamed for the collapse in the price of gold in
mid-April. With Cyprus apparently serving as a template for future EU
bailouts the assumption is that should Portugal, Greece, Spain or Italy need
help they, too, would be forced to sell their gold. Cyprus has (or did have)
14 tons. Greece has 112 tons. Italy has 2,452.

Nevertheless, investors have moved on from their preoccupation with Italy
and Cyprus. Rome has years of experience in living without a functional
government and Cyprus is not big enough to do any lasting damage. That,
anyway, is the current rationale.

So the euro's performance in the first half of April was not too shabby. It
regained a cent and a half of its losses against the pound and rose by
nearly three US cents. The Croatian kuna did even better, strengthening from
7.65 to 7.45 kuna to the euro and moving above its twelve-month and
six-month moving averages. The kuna's performance against the pound was
slightly less impressive but between 8.80 and 9.00 to the pound it is still
in a lower range than the one it occupied for most of last year.

Given that the GBP/EUR exchange rate is the main arbiter of sterling's value
against the kuna it is the developing situations in Italy, Cyprus and
Slovenia that will drive the action in April. Italy needs a government,
Cyprus needs to come to terms with the onerous terms of its bailin and
Slovenia swears it doesn't need a bailout, which makes it only a matter of
time until it gets one.

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