March 10, 2011

Europe: Odds taken on death of the euro

Confidence in the single currency has been falling since the eurozone debt crisis swept through Greece and Ireland last year – but this has opened up some interesting areas for traders.

The eurozone crisis has increased volatility in the region and has created significant trading opportunities,” says Paul Inkster, head of product at Barclays Stockbrokers. “The euro is always a popular currency trade and this crisis has only served to reinforce that trend.”

Traditional ways to bet on the euro revolve around currency pairs, but one spread betting company is offering a pretty straightforward bet: how long will the euro last?

From January, investors with WorldSpreads have been able to take a position on how many days they believe the currency will survive in its current guise. WorldSpreads’ “Euro Break-Up price” is quoted as a number representing the predicted number of days, from and including January 2011, until the Euro-Break-Up Date.

Optimists can bet higher than 730 if they think the euro will last longer than 730 days from January 1, 2011. If they are wrong and it collapses in 300 days from when the market opened, the loss is 430 times the stake.

Pessimists can bet lower than 720 if they think the euro will break up within 720 days. If it collapses in 300 days, the win is 420 times the stake. The market will last until Friday September 27, 2013 and all trades still open at that date will be settled at 1,000 days from January 1, 2011.

Alastair McCaig, market analyst at WorldSpreads, says this individual bet had captured clients’ imagination and the company had seen a more than tenfold increase in the volume of trading since customers piled in at the beginning of the year.

European markets will be glad that events have redirected the global focus on to the Arab nations,” he says. “As a consequence, the WorldSpreads Euro-Break-Up Bet market has moved over the past month from 700-710 up to 720-730, meaning more traders are giving the euro a longer lifeline – up by 20 days – as their attentions move towards the Middle East.”

However, he says this European relief might be short-lived as “one of the biggest repercussions of Middle East instability on European markets will be the increase in the price of oil futures and inflationary pressures they bring”.

Added to that is the growing pressure on Portugal to take EU aid from Germany and France and political paralysis in the form of Belgium’s record-breaking lack of a government.

But Angus Campbell at Capital Spreads, warns that, as with any of these gimmicky type bets, there is a catch.

“The market is not on how long the euro will last but on the first time any voting rights are lost by a governor of a national central bank of an EU member state,” he says. “So the euro can still be around, but the market for this bet might have ended.”

He says it is highly improbable the euro as a currency will end – because of the political ramifications of such a break-up, but believes it is possible one or two states might bail out.

“Should such a scenario arise from any of the weaker member states being forced out, then this could be dire for not only the eurozone but the global banking system and economy as well,” says Mr Campbell. “The costs of exiting are much greater than the hard times they’re having to go through now, to get their houses in order.”

Others dismiss the likelihood of an end to the euro altogether. Tim Hughes, managing director at IG index, says: “The crisis regarding eurozone sovereign debt would seem as if it will keep running for some time yet. But with so much political capital at stake over the single currency’s survival – and with no easy exit strategy from membership – there seems to be a pretty strong chance that the euro still has a degree of longevity,” he says.

This is because any attempt by the new Irish government to renegotiate borrowing rates with Germany will be closely watched because this would risk setting a precedent for other fringe members who are also struggling against mounting debts.

Others make the argument that it would be too complex to unwind it. Kathleen Brooks, research director at Forex.com, the retail trading platform, says: “A decision to revert to old currencies or invent new ones, minting and distributing the new currency and reinstating currency symbols would take years. Reference rates would need to be agreed upon so that the new currencies could actually trade, along with a period of time to allow the troubled peripheral states’ economies to recover from their recent shocks,” she says. She believes the current situation is fundamentally a credit crisis. “Euro/dollar is still 44 per cent higher than it was in 2000, and 15 per cent higher than it was in the depths of the Greek crisis back in June,” she says. “When you look at it like this, why would you abandon the euro?”

Source: www.ft.com

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