Email of the day (2)
Comment of the Day

July 20 2011

Commentary by David Fuller

Email of the day (2)

On "if the euro were to be scrapped":
"I am concerned about the Euro. If the Euro were to be scrapped, my banker claims that holders of the above would be refunded in a mixed bag of the new currencies of those countries which had been in the Euro.

"Would this be the case? If that is true, I suspect that € holders would lose money due to there being more weak than strong ex-members of the € club. He recommends, as an alternative, the already strong NOK , Sw Franc and SEK (Swed Kr). Why has the SEK risen less against the € than the other two?

"What is the yield on a 2 year maturity Swedish govt bond? Where can I find a list of international bonds on the Internet? Banks will try to peddle their uninteresting wares, so one must be able to steer in the right direction. The bond site I am looking for would have a list of primary and secondary offerings with the name of the issuer, interest rate, currency, price, YTM etc. Unless I am mistaken, there is no Singapore $ govt bond in the chart library.

"Thanks for your comments."

David Fuller's view Briefly, I have maintained for a number of years that there is no question of the euro being scrapped, provided that Germany wishes to remain in a single currency. However, for a single currency to survive there has to be fiscal as well as political union. This was never addressed when the euro was launched because Europe's politicians knew that their citizens were not ready to support it. For a lasting solution to today's problems, Europe will have to embark on a path towards fiscal union.

Additionally, I have always maintained that it was illogical to view the euro as a club which other countries could join but never leave. Hypothetically, if Greece were to drop out of the euro, I assume that people in Greece would have their salaries and pensions paid in new drachmas, probably on a 1-for-1 basis with the euro, and the Greek currency would immediately plunge in value. The same thing would happen if any other country on Europe's periphery withdrew from the euro and reconstituted its former currency.

Euro region citizens have been plunging into CHF but CHF/EUR looks overextended to me although there is no evidence that it has peaked. NOK/EUR is rangebound and continues to encounter resistance near €0.13, and you can see what happened to this cross-rate in 2008. The SEK/EUR has underperformed recently because it is neither viewed as a safe-haven currency on a par with CHF nor does Sweden have Norway's oil or large sovereign wealth fund.

Gold remains the hard currency, as you can see from this chart of gold in CHF.

Neither Eoin nor I know of an internet site that provides all of the bond information you mention but if you search you should find the information you require for individual country yields. You will find a considerable amount of information in the 'Bond Yields' section of the Chart Library, including this Singapore 10yr Bond Yield and there is plenty more back history.

I am sure your bank would be happy for you to trade in all sorts of instruments but if I were in your shoes, I would not be dumping euros for another European currency unless I was convinced that the single currency was finished. Also, if it was me, and if it had to be fixed interest, I would rather have the bonds of strong companies than those of weak governments. If it had to be government bonds, I would prefer those of growth economies. Lastly, if it was me and if yield was the priority, I would prefer high-yielding equities to bonds.

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