Currency Rate Instability

Although companies doing business internationally prefer stable currencies, speculators commonly look for profits in currency rate instability. The situation in the European Community is a case in point. A collection of European nations are to varying degrees in danger of defaulting on their national debts. The worst of the lot is Greece. There has been speculation in the press that the nation might be forced to withdraw from the European Union and quit using the Euro as its currency. For the last two years EU officials, the International Monetary Fund, the European Central Bank, and a succession of Greek officials have been dealing with the crisis. The end result is still uncertain. The continuing result of this uncertainty is currency rate instability. It starts with the Euro. However, the collective EU economy is on par with that of the USA as the first or second largest in the world. A financial crisis, renewed recession, and/or political breakup in Europe will affect markets and currencies throughout the world. Efforts to avoid financial disaster such as the French austerity plan threaten the economic growth needed to pay back the accumulated European debt load.

The most recent news about Greek debt negotiations is that European finance ministers are demanding that private investors take a fifty percent write off on the value of their investments and that they extend their loans out to two or three decades. In return the EU solvent members of the EU will provide the funds to rescue the Greeks from their financial mess. The precise interest rates involved in a new set of loans is a bone of contention as higher rates would require more money than the EU at large is willing to offer up to fix this mess. The Euro has fluctuated up and down in response to these ongoing negotiations, ministerial pronouncements, and press reports. Those who have been able to accurately read the various pronouncements have been able to profit from the resulting currency rate instability. It is not just about how to short the Euro but how to anticipate a likely recovery when the EU gets its economic house in order.

What happens if there is a Greece debt default? The concern is that many European banks as well as other investors have purchased Euro denominated bonds from Greece. If the nation defaults on its debts the resulting losses could cause banks not to loan and large investors to hold on to their money. If this happens in Europe, Spain, Italy, and even France could have problems selling their bonds at auction at reasonable rates. The doomsday scenario in this case is that government default on loans rolls across the bottom of Europe ending up in France, the continent’s second largest economy. The European Union breaks up with only the northern members remaining. The resulting currency rate instability drives the Euro down. The resulting recession in Europe hurts Asian exporters affects the Yen, Australian dollar, Yuan, and Rupee. Currency traders who do not see the whole picture sustain large losses. Those who anticipate the fallout from a poorly handled Greek debt crisis profit from the resulting widespread currency rate instability.