Whatever Greek Voters Decide, the Euro Looks Likely to Suffer

By NELSON D. SCHWARTZ

Published: June 16, 2012

It will be a late Sunday night for financial pros like Markus Krygier. In New York, London, Tokyo and beyond, nearly everyone is focused on one thing right now: Greece. To be precise, they are focused on a “Grexit” — the possibility of the country’s eventual exit from the euro. For many, the prospect has moved from “if” to “when.”

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The Greek elections on Sunday will chart the immediate course, one way or another, and investors like Mr. Krygier, a money manager in London, will be standing by to size up the results. On this side of the Atlantic, BlackBerries and iPhones will be at the ready during Father’s Day barbecues.

Who will prevail in Athens? Will it be Syriza, a coalition of leftist groups that has declared that it will annul the terms of Greece’s bailout? Or the center-right New Democracy, which says it will stick with austerity and keep Greece in the euro zone?

For the euro itself, it may not really matter much, at least in the medium term, says Mr. Krygier, who oversees $20 billion. He is betting that the euro, the currency of 17 nations from the Baltic to the Mediterranean, will eventually weaken, whatever the outcome on Sunday.

Mr. Krygier works for Amundi, a money management venture of two big French banks. And, like many others in the financial world, he says the euro will lose more value against the dollar. Even a euro-friendly election in Athens wouldn’t be enough to stem the pressure as long as nervous investors look to the dollar as a haven, he says. All the bailouts in Europe — two so far for Greece alone — have done little to contain the problems. The financial markets savaged Greece but have now moved on to bigger targets like Spain and Italy.

“The hundred billion bought us two hours of relief, and then interest rates began to go up again and markets began to zoom in on Italy,” Mr. Krygier says, referring to last weekend’s 100 billion euro bailout for Spanish banks. “It has become a systemic issue. Until we see a lasting resolution of those doubts, we feel the euro will remain under pressure.”

On that point, many professional investors and traders agree. The euro has weakened steadily as Europe’s economic crisis has worsened. In May 2011, the euro was trading at about $1.50. Late Friday in New York, it was at $1.26, near a two-year low. But the big money says the euro will weaken even more. Traders have wagered more than $30 billion against it, according to data from the federal Commodity Futures Trading Commission. That figure, which represents so-called short sales, is close to a record high.

“This short position is unprecedented in terms of size,” said Robert Sinche, global head of currency strategy at RBS Securities in Stamford, Conn. “There are a lot of people with some very negative scenarios out there, and they’ve all acted.”

It’s worth remembering that the euro has been weaker than this before — a lot weaker. After euro notes and coins went into circulation on Jan. 1, 2002, the currency promptly sank to about 86 cents. By 2008, however, it had rebounded as high as $1.60.

As forecasts go, Mr. Krygier’s isn’t nearly as bleak as some. He doesn’t expect a wholesale breakup of the euro zone, which has gone from being a far-fetched idea two years ago to a much-talked-about fear today. He says he thinks that Europe will ultimately get its act together and save the euro.

“The question,” he says, “is how long it will take and how much pain there is before we get there.”

If the left-wing parties win in Greece and back away from austerity, prompting a default or a disorderly exit from the euro, “we would expect the euro to drop like a stone,” he says. “The consequences would be dramatic.” The currency could sink to parity with the dollar, he says.

Mr. Krygier has been negative on the euro for more than two years, but his sentiment darkened this spring, as the focus of the fears moved from Greece to bigger countries.

“The big turning point was the transition from a crisis involving Greece and the smaller countries to a crisis that could engulf Italy and Spain,” he says. “It became much more existential for the euro zone itself. We clearly saw at that stage that the vulnerability had increased further.”

Mr. Krygier also expects the euro to decline against the British pound and Scandinavian currencies. And for all the recent doubts about the strength of the economic recovery in the United States, the dollar remains the pre-eminent refuge for foreign investors.

“The U.S. economy is still seen as a safe haven because of the depth of its financial markets, and it’s also sufficiently removed from the epicenter in Europe,” he says.

To be sure, Mr. Krygier says, a victory by those who stand behind austerity could produce a quick snapback in the euro’s value against the dollar. But even if that happened, it probably wouldn’t last, he says. “You might see a short-lived recovery, but in the medium term, the euro has to be weaker.”

And so Mr. Krygier, like just about everyone else in the financial world, will be waiting things out on Sunday. First, he plans to watch the European soccer championships. (Germany, which has prescribed austerity to save the euro, is playing Denmark, which opted out of the common currency and still uses the krone.) Then he will stay up as the first election results come in.

Whatever happens in Athens, doubts about Spain and Italy will only continue to grow, Mr. Krygier predicts. Those nations’ debt loads are large, and both are increasingly seen as unable to make the kind of changes that will persuade investors to keep buying their debt.

THE ultimate answer, Mr. Krygier says, is for European governments, led by his native Germany, to agree “on concrete and credible steps toward greater fiscal and political integration,” including the issuance of broader euro zone debt. That would eventually allow Spain and Italy to borrow what they need with Continentwide backing. In addition, he says, leaders should come up with a euro zonewide bank guarantee to avert full-scale bank runs in shaky countries.

Ultimately, Mr. Krygier says, the market will force policy makers’ hands. “But with 17 parties sitting at the table, the decisions are glacial,” he says. “The markets move in a rapid-fire fashion. The stakes are increasing.”