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Monday, May 17, 2010

Paradigm shift in the offing?

The differing viewpoints of European Union states puts a strain on their common currency, and may mean the euro experiment should end, according to John McCarthy, director of currency trading at ING Financial Markets LLC.

“Unfortunately the euro isn’t strong enough in many respects to absorb those differences,” McCarthy said in a telephone interview from New York. “In the long run, it has a breakup written over it. But stranger things have muddled through. It is possible they cobble something together and everybody works hard, but as a betting man I’m betting it’s not going to survive in its current form.”

McCarthy put the odds of a breakup at about one in five.[...]

“The real question becomes whether or not this crisis is so difficult to overcome that it’s just easier to propose a smaller euro with those countries who are relatively in sync,” he said.

The resilience of Europe’s equity markets indicates the market may anticipate a change in the euro’s structure, McCarthy said. The Stoxx 600 slid 0.2 percent to 248.09 in London after earlier rallying as much as 1.1 percent.

“That the equity markets in Europe have held up reasonably well may have an implicit suggestion that a crisis in the euro and an ultimate breakup may not be such a bad thing,” McCarthy said.
A breakup would relieve the pressure on those countries with stronger fiscal conditions to have to issue debt to bail out more troubled countries, he said. Additionally, cheaper currencies would boost exports for those countries struggling to restore their balance sheets and would likely lead to lower interest rates, according to McCarthy.

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