How to Profit From Euro Break-Up?


Since it was formed 10 years ago, Euro has become a solid currency. However, things are going on the opposite way in the last few weeks. It start with Greece where their budget deficit reach more than 12%.

The problem seem to be cantagion to PIIGS country (Portugal, Italy, Ireland, Greece and Spain). Germany, European Union strongest economy seem not willing to help out what they see as a bunch of Mediterranean layabouts.

New York-based investment bank Morgan Stanley is among those saying the possibility of a euro collapse has to be considered. So, if the euro might not be around in 2020, here are seven trades to start thinking about.

Sound Money

One: Buy German bonds, and sell the DAX index. Germany is one of the most creditworthy countries in the world: It hates budget deficits, runs a big trade surplus, and believes in sound money. But it is being dragged down by spendthrift neighbors that hitched a ride on the currency-union bandwagon. Outside of the euro, German bonds would soar. But so would the “new deutsche mark,” hurting the exporters that dominate the DAX.

Two: Buy the dollar. Sure, it has its own problems. The U.S. budget and trade deficits are huge. Wall Street is under attack from populist, crusading politicians. Its share of the global economy is in long-term decline. But with the euro gone, it would be the only serious reserve currency — at least until China decides to take on that role. Without any competition, the dollar would only strengthen.

Three: Buy Italian shares. Italy has been the big loser from the euro. Spain, Ireland and Greece all rode a bubble created by cheap money. The crash might be nasty, but at least there was some fun before the party ended.

Currency Devaluation

Italy has just been stuck with a decade of restrained growth compared with the 1990s. Liberated from the shackles of the euro, the Italian economy could start to motor again if the currency can be devalued and wages can be held in check.

Four: Sell Spanish banking stocks. Led by Banco Santander SA, the Spanish lenders have risen to global prominence. Santander is the 11th-largest bank in the world, measured by market value. Banco Bilbao Vizcaya Argentaria SA is in the top 40. But Spain is a relatively small country, with unemployment exceeding 20 percent and an economy still in recession. Without the euro, its banks would find it impossible to maintain those kinds of positions in the global financial system.

Five: Sell anything to do with Belgium. The collapse of the euro would mark the end of the process of constantly expanding the European Union — or what is sometimes known as the Belgian Empire. As the hub of a global superstate, Belgium has a certain status. Without that distinction, it becomes a small place where you can buy some nice chocolate and change trains.

Save Itself

Six: Buy the pound. Sure, the U.K. might have a terrible budget deficit, shaky banks on every corner, and no stable government after this week’s election. But at least it stayed away from the mess of currency union. It won’t have to bail out Greece, Portugal or Spain. It just has to save itself. Against its neighbors, it will look rather stable. That should be worth a few points on sterling.

Seven: Buy airlines. For a few years, the “new drachma” would make the Iraqi dinar look like a haven of stability. It would plunge, and wealthy northern Europeans would be taking three or four holidays a year on Greek islands. That would be great for the companies that fly tourists there. Add in the weakness of the new Portuguese escudo, Spanish peseta and Italian lira, and the guys at Airbus SAS will be working nightshifts to keep up with the demand for new planes to get everyone to the beaches.

Source : Bloomberg

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