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Home > Opinion > Nick Rice

By Nick Rice | Published Aug 06, 2012

Advisers must plan for potential euro demise

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When Mario Draghi became president of the European Central Bank (ECB) last year, and Mario Monti became prime minister of troubled euro giant Italy, they were known in the press as the Super Mario Brothers. Following the conservatism of outgoing ECB president Jean-Claude Trichet, and the bunga-bunga antics of outgoing Italian prime minister Silvio Berlusconi, these men at least looked like they would take some active steps to help save the single currency.

Initially, the first Super Mario Brother – Mr Draghi – proved as active as billed, even if some of the activity was arguably misguided. In the short term, Mr Draghi’s ECB long-term refinancing operations tided the eurozone’s indebted governments and banks over, although in the long term it might even have made the situation worse, leaving the debt of unstable countries in the grasp of their unstable banks.

For the latter reasons, Investment Adviser was always publicly sceptical of the long-term refinancing operation. So after Mr Draghi’s pronouncements on July 26 that the ECB would do whatever it could to save the euro – “and, believe me, that will be enough” – we and the rest of the media keenly watched the ECB’s press conference last Thursday (August 2), hoping to see what its best efforts would look like.

Advisers face only one conclusion: even if the euro does not collapse, they must prepare their business and their clients for the possibility.

Nick Rice

After years of disappointing summits from eurozone leaders like Mr Monti and meetings at the ECB, this press conference was as fruitless as any effort so far. Mr Draghi announced precisely nothing except ‘maybes’ – no definite money creation, no bond buying, no structural changes, no moves towards banking union. With the reservations of Germany’s hawkish Bundesbank weighing on his shoulders, he looked less like Super Mario and more like Pooper Mario – of the party-pooping variety.

Advisers face only one conclusion: even if the euro does not collapse, they must prepare their business and their clients for the possibility. With politics dysfunctional, central bankers have become ‘get out of jail free’ cards for entire continents. If the ECB cannot perform this function in a timely manner, the euro may be lost. With the FSA drawing up contingency plans for the collapse of the euro, the regulator is unlikely to forgive advisers who do not have one in place.

If advisers have not done so already, now is the time to review not only clients’ holdings in euros and euro-denominated assets, but funds that hold those assets as part of their portfolios. It is time to examine whether funds’ trades with eurozone counterparties – particularly banks – still pass muster. Many funds effectively partner with eurozone counterparties when they lend out their securities or invest in derivatives or synthetic exchange-traded funds. If those eurozone counterparties go bankrupt under normal conditions, such investments are often adequately collateralised. But the collapse of the euro may take even the most sophisticated collateralisation arrangements down with it.

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