Alice Ross
Leading investment banks are considering creating currency products that would protect companies and investors in the event of a partial break-up of the euro.
Banks report that some clients have asked them to provide a hedging tool that would protect their exposure in countries that reintroduced their national currency.
?There?s a lot of interest in this,? said Bernie Sinniah, global head of corporate sales at Citigroup, one of the largest foreign exchange dealers. ?We are looking at all alternatives and trying to find a solution.?
Another bank said it had held preliminary meetings with clients but added that there was no industry standard in place for how the contracts would work.
The impact of one or more European countries leaving the single currency has been discussed in boardrooms in recent months as directors pore over how any split in the euro would affect business.
Companies and investors can remove currency risk from their portfolios or balance sheets by buying contracts that allow them to agree an exchange rate – for example between sterling and euros – at a fixed price on a fixed date. Concerns have been raised, however, over the status of these contracts if a country leaves the eurozone.
So-called ?legal tender contracts? would allow companies concerned about their European assets to hedge their exposure in the legal tender of a certain country, rather than the euro, providing protection if one or more countries leaves the single currency.
Senior bankers in London said they had held private meetings with clients who had pressured them to offer such products.
Investors said the products would calm their fears over the impact of a euro break-up. ?I think this is a very prudent industry response to a risk management problem,? said James Wood-Collins at Record Currency Management, which has approached a number of banks to press for the products on behalf of its pension fund clients.
Creating the instruments would involve risks for the banks, which would have to promise to deliver new or returning European currencies in a market that could be volatile and illiquid. Banks said it would be difficult to put a price on such contracts as there was no way to predict how a revived European currency would be valued. The price that clients would have to pay for the protection could be significant, the banks added.
Some bankers said the move could be politically delicate, with a reputational risk inherent in creating a product that was seen to bet on a eurozone break-up.
?I think we?re not really going to get involved in a product positioned around the break-up of the euro,? said one big bank?s chief of foreign exchange.