Post Euro Settlement System

If the Euro Zone breaks up will there be a post Euro settlement system for Forex transactions? The possibility of southern tier nations pulling out of the European Union brings up the issue of Forex settlements on individual national currencies. If Greece pulls out it will likely use the drachma again as its currency. Italy would use the lira, Portugal the escudo, and Spain the Peseta. How would this affect a post Euro settlement system for those wishing to trade these nation’s currencies? Nearly three fourths of currency trades in major currencies use CLS Bank International to contain counterparty risk. Although trading a new currency in Forex is said not be especially complicated the business of insuring that transactions are processed and payments made can be more complex. Thus banks that engage in currency trading and institutions such as CLS Bank International are said to be making contingency plans for breakup of the EU and for one or more new currencies in the Forex market.

Although a nation can decide to print its own post-Euro currency again, the devil is in the details. For example, at the heart of the EU debt crisis is the ability of Greece, Italy, and others to pay their national debts. Bonds issued by these nations may be denominated in Euros but may contain wording that allows the nation to pay with its own currency if it pulls out of the EU. This could be a fast and easy solution for any or the entire PIIGS group if they were to greatly devalue their new currency in regard to the bonds that carry their national debt. For the Forex trader a post Euro settlement system would function much like what is currently in use. However, a lot of preparation may be required in order to streamline the so called back office processing of counterparty risk issues.

For a Forex trader interested in trading any new currencies that may evolve from the European debt crisis, a streamlined post Euro settlement system could be only one of many issues. When a new currency comes into being it is as a declared value but, in fact, the market quickly decides the currency value related to the Euro, USD, and other major currencies. The same basic factors that determine the value of the dollar, Euro, or Swiss franc come into play. What is a nation’s balance of payments? Does it have cash reserves? What is the employment picture? How great a debt does it have? Many traders may choose to ignore any risks inherent in a post Euro settlement system in order to trade any new currencies that might arise. The market inefficiency that typically follows great changes in fundamentals provides opportunity for profit for currency traders. Traders may choose to trade options on any new currencies in order to contain their risk. Those selling Forex options contracts involving any new southern tier European currencies may well choose to price their offering very high due the risk involved. The entire issue of a post Euro settlement system may well play out in the days ahead if the EU is unable to contain the crisis.