A break-up of the eurozone might be regarded very much as a tail risk in today's markets, if only thanks to the European Central Bank's brace of three-year longer-term refinancing operations in December and February, but it cannot be completely ruled out.
Simple caution suggests challenges lie ahead, most immediately in the form of French presidential elections. The importance of a smoothly functioning French-German axis must never be overlooked, and there are fears that if challenger François Hollande were to win there could be demands for renegotiation of the latest EU fiscal pact. Structural issues surrounding attempts in Italy and Spain to bring public finances under control could also present further obstacles to progress.
For those who decide to hedge against break-up, one obvious problem is the clear lack of available alternatives. The US dollar, sterling, yen, Norwegian krone, Swiss franc and gold all have their drawbacks, ranging from quantitative easing to a lack of liquidity and downside risk, observes Alan Higgins, chief investment officer UK at Coutts. “Our core scenario assumes the eurozone remains intact”, he says. “If not, investors will be stretching to find a haven.”
A second, perhaps less obvious problem for aspiring hedgers, would be the legal status of euro-related contracts. There are suggestions that investors, corporations and any other organisations with significant cross-border exposure are beginning to think carefully about the impact that fragmentation might have on their eurozone contracts.
Long-dated volatility in equities remains expensive and the cost of sovereign CDS protection is high, but investors can buy investment grade CDS protection at a low cost as zero interest rate policy has pushed investors to accept more risk in search of yield.
Full article (FT subscription required)
© Financial Times
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article