How to profit from the Eurozone breakup
Split Into Two Euro Areas This is another option with, in our opinion, a low probability of occurring, but has been put on the table several times not only now but also before the creation of the Eurozone. Since there is a distinction between the PIIGS and the rest of the Eurozone or, more simply, between the northern and southern countries, some economists think Germany could try to create a restricted euro area with countries like Austria and the Netherlands that have more of a tradition of imposing tight controls on budget deficits and let the other countries form a second Eurozone. Since France would hardly accept German leadership, it would probably prefer to join this second Eurozone as the leading country. But one of the reasons that led to the creation of the EU in 1957 was to join Germany and France in the same area. A split into two euro areas would undermine the original objectives of the EU creation. If France were to opt out of such a ‘first’ Eurozone group, then every other country would see the second group as a sort of championship league for the relegated teams. The idea of Europe running at two speeds has previously been abandoned and we doubt it can be adopted now.
Partial Breakup This is the most likely scenario, and the one spread bettors should be prepared for. At some point in time, one or more Eurozone countries can decide to exit (or maybe not actually being left with any other option).
The effects deriving from such a decision would vary widely from country to country and depending on how suddenly it occurs and also how mutually agreed-upon the exit is. The bigger the surprise; the uglier the financial consequences. The most discussed possibility has been that of a Greek exit. Germany, and especially Finland, are giving out increasingly more apparent signs of an unwillingness to supply much more in the way of funds or, indeed, to give any extension on adopted measures for the bailed out countries. With Greece’s GDP representing just 1.7% of the EU total output as the chart above illustrates, they may be tempted to cut the oxygen. No doubt preparations for such an outcome have been scenario tested and the major banks would survive it. The exit would occur in an orderly manner and, aside from an initial knee-jerk reaction, equities around the world wouldn’t suffer much from it. The Greek’s would, of course, suffer the most with unemployment rising, output being slashed and their international trade initially falling. The Drachma would be re-introduced - with a probable immediate halving of its value relative to its Euro entry level. The gains in competitiveness would be outpaced by inflation in the short term and the economy further throttled by rises in interest rates. It seems that either route, inside or outside the euro, the Greeks will continue to see their economy shrink. Should Greece be ejected from the Eurozone, a trade to consider would be to buy the exporters and those tourism exposed plays on a sharp sell off.
July 2012 | www.financial-spread-betting.com | 65