At a conference in July, the head of JPMorgan Asset Management Mary Callahan Erdoes said “shorting the euro” was the best investment idea she can offer for the time being. Many seem to agree with her but when it comes to shorting, the hardest part is timing. With so many uncertainties and a number of governments involved, each with their own national agenda, it becomes even harder to predict the economic repercussions of the current Eurozone crisis.
Lord Rothschild seems to have taken his stand and has bet £130m against the euro using the £1.9bn investment trust RIT Capital Partners where he is executive chairman. Such a move, made by a very experienced former investment banker, can only be seen as bad news for the currency.
Using currency positions as a form of hedge is not something Rothschild has not done before. When the sterling declined in 2008, his trust significantly increased its exposure to the currency but later scaled back from both the pound and the euro as it anticipated the inevitable recessions in both regions.
!m(/uploads/story/273/thumbs/pic1_inline.png)At the end of July, RIT had a -7 per cent net short position in terms of principal currency exposures on the euro, up from -3 per cent at the end of January. With their net asset value of £1.836bn, the position amounts to £128m. According to sources close to RIT, the new position is not a doomsday forecast for the euro but a realistic approach on a currency that remains weak with no current foreseeable prospects of strengthening.
Bad news for Europe remains abundant as Finland’s foreign minister has also declared the country is preparing for a break-up in the Eurozone.
“We have to face openly the possibility of a euro-break up,” said the country’s veteran minister Erkki Tuomioja “Our officials, like everybody else and like every general staff, have some sort of operational plan for any eventuality.”
The Finnish minister is strongly aginst the requested two-year extension as well as any further financial aid for Greece, unless the Greek government shows clearly that it has reformed its economic looseness. This will become clear when the EU-IMF Troika inspectors report back on Greek’s compliance with the bail-out conditions.
Angela Merkel seems to be considering easing the terms for Greece despite strong opposition in Germany. Greece’s Prime Minister Antonis Samaras will visit Berlin on the 24th of August to speak with Merkel and try to convince the German chancellor to show leniency toward his country. For many, Greece is already a hopeless case with regard to its debts, which most likely won’t be repaid. At some point lenders will stop giving money and an immediate default will follow. The more important question is how other countries will be influenced by a possible Greek exit from the Eurozone and will Spain and Italy manage to contain the situation at their own backyards.
Last Friday Madrid’s mayor Ana Botella became the first high-level Spanish official to confirm that the country would need a bail out. “There’s no doubt about it. It’s very probable that we’re going to have to ask for help from the European Union,” Botella said.
Stefan Hofrichter, chief economist at Allianz Global Investors, joined the pessimists with a recent report, pointing out an urgent need for a hedge against the consequences of disintegration in the Eurozone. His estimations predict European equities will be the ones to suffer most and could decline by 25 per cent or more.