Planning for the unthinkable around the euro

Asset managers find it hard to think in terms of the break-up of the eurozone, though some do have contingency plans already in place.

It all began at the start of January when David Rutter, then chief executive of Icap’s trading platform EBS, revealed that it was running tests to ensure that all 17 eurozone legacy currencies could be traded against the dollar in the system.

“A precautionary step to make sure we’re ready for any eventuality,” he said.

With increasingly negative economic indicators coming out of Greece, fears that the euro as we know it will not be here in a year from now have escalated over the past few months.

Citigroup recently increased its estimate of a Greek exit from the eurozone from 50% to 75%. Economists, corporates and banks have also started to get ready to face this disruptive scenario.

A prize at stake

Meanwhile, the 2012 Wolfson Economics Prize is due to be awarded on 5 July for the least disruptive plan to i­mplement a break-up of the European single currency. With more than 400 entries submitted for the award, a shortlist of five contenders is being considered for the final £250,000 prize.

Corporates and financial i­nstitutions have recently tested a number of exit scenarios, according to Neil Record, chairman of Record Currency Management and one of the five finalists shortlisted for the prize. But, he notes, the asset management community remains ­reluctant to consider the break-up option.

“Continental European asset managers just don’t believe that politicians will allow the euro to break-up. And this is a very deep belief, which just may be changing now very slowly. They are not planning for this event. I see this as a big problem.”

Record suggests a significant Anglo-Saxon/continental Europe difference of view in the investment ­community on this issue. He says: “Anglo-Saxons see Greece’s s­urvival in the euro as very tenuous, while the continental ­Europeans see a Euro exit or break-up as impossible.

“For the past three years, the Anglo-Saxons have been avoiding assets in Southern Europe as they perceive a real risk that they will fall out of the euro, with a potentially large subsequent currency devaluation.”

Record says the euro is held together by a c­entripetal force, which is the political will for the continuous ­integration of Europe.

Opposed to that is a centrifugal force, with Southern Europe and France now resisting Northern European inspired austerity. Both forces are strong, but centrifugal forces appear to be moving faster.

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