I think the exit of the PIGS from the EURO is inevitable. How can I play that? I’m not sure if the Euro goes up or down on that. If the worst credits leave, then the currency gets stronger. But before that happens, the boat is going to creak and moan until they throw Jonah into the sea. So the Euro is going to weaken as the ECB puts in good money after bad?
It seems that monetary union without political union is a fundamentally flawed idea. Now that the strains of this unequal partnership are showing on the public debt fault lines, it warrants a closer look on how this could impact investments. Clearly no major country is going to default in the sense of ultimately refusing to pay back debts at all. They will default in what they pay you back. If you are owed 100 of something, you may get only 50 of that something back or maybe something like drachmas instead of euros.
We hear a lot about how our debt in this country is spiraling out of control. Indeed it is by many measures but I think it is important to contrast it with the debt/GDP ratios of most countries. In that regard according to the C.I.A. Fact Book,the U.S is healthier than most industrialized economies. For example the U.S. at has a far better ratio than Germany.
A little background on the euro from Wikepedia. The euro (sign: €; code: EUR) is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by theInstitutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The currency is also used in a further 5 European countries (Montenegro, Andorra, Monaco, San Marino and Vatican City) and the disputed territory of Kosovo. It is consequently used daily by some 332 million Europeans. Additionally, over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.
The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar. As of June 2010, with more than €800 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the U.S. dollar.[note 14]Based on IMF estimates of 2008 GDP and purchasing power parity among the various currencies, the eurozone is the second largest economy in the world.
Needless to say if the euro were to unwind or collapse it would cause severe global dislocation and possibly an unprecedented buying opportunity as the world did just fine before the euro and will certainly survive it’s demise. People will smell the stench before there is an actual corpse. There will be a race to turn in your euros for something else and the currency will decline. Shorting the FXE , Rydex Euro Trust Currency shares will be an obvious play.
The FXE represents the relative value of the euro vs. the U.S. Dollar. There is a current perception that the risk on trade requires the Dollar to go down and the euro to rise. So in recent months as the market has risen, the euro has also gained in value vis a vis the Dollar. So shorting the FXE could provide some hedge to U.S. stock market declines. Put on the FXE would be another more quantifiable way of putting this trade on.