Leading investment banks are considering creating currency products that would protect companies and investors in the event of a partial break-up of the euro.
Banks report that some clients have asked them to provide a hedging tool that would protect their exposure in countries that reintroduced their national currency. “There’s a lot of interest in this”, said Bernie Sinniah, global head of corporate sales at Citigroup, one of the largest foreign exchange dealers. “We are looking at all alternatives and trying to find a solution.” Another bank said it had held preliminary meetings with clients but added that there was no industry standard in place for how the contracts would work.
So-called “legal tender contracts” would allow companies concerned about their European assets to hedge their exposure in the legal tender of a certain country, rather than the euro, providing protection if one or more countries leave the single currency.
Creating the instruments would involve risks for the banks, which would have to promise to deliver new or returning European currencies in a market that could be volatile and illiquid. Banks said it would be difficult to put a price on such contracts because there was no way to predict how a revived European currency would be valued. The price that clients would have to pay for the protection could be significant, the banks added.
But Mr Sinniah believes the products will be issued eventually in response to client demand. “There are some risks but I think the banks are coming to terms with it”, he said.
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