Euro heading for freefall in echo of housing crash

Currency could be next sub-prime mortgage crisis say traders after day of turmoil on markets

Simon English
Tuesday 08 May 2012 00:59
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The euro could go into freefall in the next few weeks as investors come to see it as comparable to a sub-prime mortgage bond, traders warned yesterday after a dramatic day on world stock markets.

With European voters giving austerity a clear thumbs-down, currency experts predicted a grim future for the euro, even if some of the countries that use it manage their way though the present difficulty.

Jason Conibear, director of the global foreign exchange specialist Cambridge Mercantile, said of the election results: "The initial reaction of the markets after the weekend was to get out of the euro.

"There's every chance the euro will go into freefall in the weeks ahead against all the major currencies. Investors are waking up to the fact that the once ridiculous notion that the euro could collapse is increasingly the most likely outcome."

That it turn could give a further boost to the UK pound and the US dollar, good for the notion that both nations have "safe-haven" status, but bad for exports which might boost growth.

The euro fell sharply in early trading against the dollar yesterday while the pound soared against the euro.

Mr Conibear added: "Europe is not the place to be right now. It's got the same appeal for investors as a synthetic CDO." Collateralised debt obligations were one of the dubious financial instruments used to bet on US mortgages that hindsight shows borrowers were never likely to repay.

"Whether it was right or wrong, until the French and Greek elections this weekend there was at least a script. The script of austerity has now been torn up and the sovereign peoples of Europe are starting to ad lib," Mr Conibear said.

European stock markets thathad been on the slide recovered ground in afternoon trading yesterday after Spain indicated that it was willing to bail out its struggling banks. Mariano Rajoy, the Spanish Prime Minister,gave no details, but said in a radiointerview that he "would not hesitate to do it".

By close of play the Euro STOXX 50 index of blue-chip shares was up 1.6 per cent at 2,284 points.

One sign of the strife in Greece was that the yield on 10-year government bonds rose again to 22.15 per cent yesterday. Governments that have to borrow at anything above 7 per cent are generally regarded by markets as in serious trouble.

Economists at Citigroup now say there is a 50 to 75 per cent chance of Greece leaving the currency union in the next 12 to 18 months.

The veteran stock market commentator David Buik, of BGC Partners, said: "It's Bon Voyage Austerity and Bonjour to the threat of financial chaos."

Some say Euro stock markets will also tumble.

Francois Duhen, equity strategistat CM-CIC Securities in Paris, said:"We are very worried about Greece. It will be difficult to make a new coalition. I hope they will do it because if they don't we are heading for a 10-15 per cent downside for the European stock market."

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