Euro Comes Under Attack; Sterling Under Pressure
Wednesday, February 10, 2010

Hedge fund managers and traders are lining up huge bets against the euro as concerns grow that the debt crisis in Greece and Spain's precarious fiscal position will weight down on the single European currency.

Figures from the CME Group, the largest regulated foreign exchange marketplace in the world, and the second largest electronic foreign exchange market, show that traders built up record net euro short positions of USD7.6bn in the week ending February 2, according to the Financial Times.

Last week, the euro had depreciated by 1.3% against the US dollar and hit a near eight-month low of USD1.3586 on February 5. The European currency has also slumped against the Japanese yen, reaching a near 12-month low of JPY120.71 last Friday. While the euro has firmed somewhat this week, its recent fall in value, and evidence that investors are looking to offload the currency, suggests that confidence in the European Central Bank and eurozone governments to contain the fiscal crisis in Greece is waning.

Last week, the European Commission approved an ambitious budget-deficit reduction plan for Greece, which includes fiscal measures and structural reforms designed to budget deficit by 4 percentage points to 8.7% of GDP in 2010. But there are doubts about whether the Greek government has the stomach to carry the plan through in face of oppostion from public sector workers about to lose their jobs.

Concerns are also growing about Spain's ability to stop its budget deficit growing and service its debt after Spain's minister for public works attacked those offering "apocalyptic" visions of Spain's public finances. Spain's budget deficit hit almost 11.5% of GDP last year, and the government plans to raise additional funds through a nearly USD77bn this year by issuing more bonds. A similar situation is also brewing in Spain's neighbour, Portugal.

Under the EU Growth and Stability Pact, which underpins the single currency, eurozone member states are obliged to maintain a ceiling on budget deficits of no more than 3% of GDP.

Although not a member of the eurozone, confidence that the UK, which has a budget deficit approaching GBP180bn (USD281bn), can meet its future debt obligations is also fragile. UK public debt as a share of its economy is at similar levels to Greece and Spain, and Simon Johnson, former chief economist for the International Monetary Fund has poured oil on troubled waters by suggesting that the UK should be added to the list of EU members states facing fiscal crises.

"Unless you can persuade the markets that you're really going to bring the budget under control within the foreseeable future and you're going to have some credible actions - and you're going to have to do some persuading - you're going to have big trouble," he has said.

Worryingly for the UK government, Jim Rogers, co-founder of the Quantum Hedge Fund with George Soros, which famously forced the UK out of the EU Exchange Rate Mechanism almost 20 years ago, has described sterling as "finished." Some analysts have suggested that the UK cannot be classed in the same bracket as Greece, which continues to suffer something of a 'credibility gap' with international investors. It remains to be seen however, how international investors will react if the UK loses its coveted 'triple A' credit rating, as some are predicting.