Some say the eurozone is recovering modestly which will help the euro; others are laying odds it’s over for the zone.
If the euro had its own anthem, would it be Gloria Gaynor’s “I Will Survive”? Whether the euro will survive is lately been the question on many minds as the currency gets rocked by one sovereign debt crisis after another. Lately it’s Ireland, tomorrow? Portugal, Italy, Spain, Greece?
Most of “officialdom” has understandably come out in support of the euro, but many in the investment community think otherwise.
The Organization for Economic Cooperation and Development (OECD) is one organization that thinks the euro will weather these storms. Today it released a survey that was somewhat bullish on the currency, saying there has been modest growth in the euro area. The OECD also outlined steps that need to be taken for recovery to continue and for the euro’s survival. Proposals include a new “cross-cutting approach” to economic and financial management that help the zone “avoid future imbalances.” The approach should include “a broad range of policies, including sound fiscal policy and macroprudential tools.” Also, “surveillance of country-level imbalances should be stepped up.”
Likewise, on Friday both Germany and France scolded fellow eurozone countries to be more vigilant on budgets going forward and work more closely together in order for the euro to continue to live another day. In a joint press conference, French President Nicolas Sarkozy and German Chancellor Angela Merkel said the euro’s survival was “non-negotiable” and that they were committed to keeping it alive.
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But others are less optimistic. A UK consultancy called the Centre for Economics and Business Research (CEBR) reportedly said the euro had a “one-in-five chance of surviving” in its current form. To keep the euro alive, the CEBR wrote in a white paper, would “require cuts in living standards greater than the UK faced in the Second World War” for some of the weaker eurozone countries.
The European Central bank has been buying bonds to help stabilize the situation. However, this might not have the desired result. For example Fed’s been buying lots of treasuries lately but yields keep moving higher. Treasury 10-year notes have actually risen in yield almost 90 basis points since November 4 when the FOMC announced its $600 billion in Treasury purchases through next June – so called QE2. There has been lots of talk that the rise in yields since then is an indication that QE2 has failed.
But the dollar seems to hang in there and perhaps the euro will, too. It would be disastrous for a collapse and it is certain banks the world over would face trillions in losses – and subsequently severely curtail lending to anybody, corporates included.
So how do corporates look at the potential for an implosion of the euro? They are surely worried about massive and unpredictable movements in the euro rates, but it is not really feasible for corporate risk models, like VaR – which relies heavily on historical data and correlations – to take into account and reliably “model” the impact of a breakdown in the euro.
Anecdotally, treasury pros discuss it qualitatively in various ways and look at multiple scenarios and possible actions, for example, “what happens if one or several countries drop out of the euro and how do we recoup those losses?” said a peer-group member in a recent meeting. VaR-type models are tools in an overall risk analysis information package, but does not answer every question and is not something that’s meant to prompt hedging or action over every worst-case scenario.