World Business
Crisis casts a shadow over euro
By Bo Nielsen and Liz Capo McCormick (China Daily)
Updated: 2010-04-30 10:37
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Workers repair the Euro sculpture outside the European Central Bank headquarters in Frankfurt.[Bloomberg] |
Fiscal problems threaten to break apart 16-nation currency union
COPENHAGEN: Investors are abandoning the euro at a rate not seen since the collapse of Lehman Brothers Holdings Inc as Europe's worsening fiscal crisis threatens to splinter the 16-nation currency union.
Pension funds and banks sold euros this month at the fastest pace since the second half of 2008, when the currency tumbled more than 25 percent against the dollar between mid-July and the end of October, according to Bank of New York Mellon Corp, the world's biggest custodian of financial assets with $23 trillion.
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"The assumptions that went into the makeup of the eurozone, and hence the euro, are now being brought into question and revalued," said Eric Busay, a manager of currencies and international bonds in Sacramento at the California Public Employees' Retirement System, the largest US public pension, with $202 billion under management.
"There are differences, and screaming differences, that have now been shown between the regions of the eurozone," said Busay.
While the euro became a rival to the dollar after the common currency's inception in 1999, the debt crisis that began in Greece shows how it is being shaken by one country comprising 2.6 percent of the region's economy.
The euro's 11 percent decline in the past six months made it the worst performer among its 16 most-traded peers. Standard & Poor's cut the credit ratings on Greece, Portugal and Spain in the last two days.
Credit-default swaps on the debt of Greece, Portugal and Spain climbed to record highs as the 16 nations making up the euro failed to bridge economic and political differences fast enough for traders.
The euro fell to a one-year low of $1.3115 on Wednesday in New York, down from 2009's high of $1.5144 on Nov 25, as German Chancellor Angela Merkel said in Berlin the "stability of the eurozone" was at stake if a 45 billion-euro ($59 billion) loan package for Greece orchestrated by the International Monetary Fund (IMF) can't be delivered soon.
Currency strategists are having a hard time keeping up with the decline. The median average of 32 forecasts compiled by Bloomberg is for the currency to end the year at $1.32. In February, the estimate was $1.43. The euro fell 0.1 percent to $1.3209 on Thursday.
Bank of New York Mellon's chief currency strategist, Simon Derrick in London, said the euro may tumble to $1.10 by the end of 2011. Morgan Stanley predicts it will trade at $1.24 by year-end. Without central bank support, the euro's long-term fair value is $1.20, UBS AG said April 26.
Investors are on course to sell a net 50 billion euros of euro-region bonds this year, compared with purchases of 225 billion euros in 2009, according to a Nomura Holdings Inc projection.
Central banks reduced the share of euros in their $8.1 trillion of reserves to 27.6 percent in the fourth quarter of 2009 from 28 percent in the previous three months, according to Morgan Stanley calculations based on IMF data. The figure was about 17 percent when the euro was introduced 11 years ago.
"Central bankers and institutional investors have spent 10 years pricing out the likelihood of a euro-zone break-up, and now they have to price it in again," said Emma Lawson, a currency strategist in London at Morgan Stanley.
