Bond auctions across Europe indicate that interest rates on Italian and Spanish bonds are rising to unsustainable levels, and even German bonds (Bund) are experiencing hiccups. (This is no longer just about Greece). A month ago, the demise of the euro was considered a long shot. Now it's more a question of what can be done to save it.
Where is decisive leadership in Europe?
So far, the silence is deafening.
Much of the action taken by European authorities has been counterproductive. By making the Greek haircut to banks consensual (e.g., so that the haircut would not technically qualify as a “default”), so that owners of Greek credit default swaps (CDS) could not collect any insurance with respect to the Greek default, future investors in euro-denominated bonds (e.g., Spanish or Italian debt) would rather not take their chances (with or without CDS). If a 50 percent haircut is not a default, then what is?
This fiddling with rules has only served to increase the reluctance of investors or banks to lend to any European government, helping to increase borrowing costs across the European Union at the worst possible time -- a perfect example of how fiddling with the rules for self-serving advantage only serves to dig a deeper hole.
Now to translate the uncertainty surrounding the euro to the level of the man in the street:
* Will the euro cease to exist as a currency? If so, what will happen to contracts denominated in euros?
* Will one or more economically weaker countries resign or be dropped from the eurozone, in which case there might be an even stronger “core” of eurozone countries? In such a scenario the euro might even emerge as a stronger currency than today.
* Unless dramatic action is taken to rescue the euro, if it does not cease to exist as a currency, it may become substantially weaker. This may create windfall profits and losses among parties to euro-denominated contracts. I, for example, have entered into a lease agreement with an option to sell a house in euros. If the euro collapses, my lessee will only be too delighted to purchase the house in vastly depreciated euros. There are most likely millions of such contracts, both inside and outside the eurozone, which would create grief for the contracting party suffering from devaluation.
Bottom line: If the euro were to collapse in value, this is likely to create massive and unintended wealth transfers, creating windfall profits for some and great difficulties for others.
In Central Europe, Slovenia and Slovakia were very fast to join the eurozone. Poland, Hungary and other Central European countries may be thankful that they did not immediately rush into the euro. Under the above scenarios, having a local currency may provide a degree of insulation from the eurozone difficulties. Wouldn't it be ironic if the Polish zloty and the Hungarian forint would become safe havens from eurozone fallout?
The world waits with baited breath to see whether Germany and other wealthy members of the eurozone have enough at stake to depart from their strategy over the past few years of providing “too little, too late” in defense of the euro and carry out a definitive, last-minute rescue of the currency and to see what form such a rescue might take.
*Les Nemethy is CEO of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on mergers & acquisitions. He is the author of “Business Exit Planning,” published by John Wiley & Sons.