Can the Euro Zone Cope with a National Bankruptcy?

Der Spiegel
February 22, 2010

As speculators attack the euro, Europe is facing a growing threat of national bankruptcies. The consequences would be dramatic for the whole of the continent, especially German banks, which are highly exposed to risky debt. EU politicians are willing to pay almost any price to help the beleaguered countries.

By SPIEGEL staff

On Wall Street, they call Bill Lipschutz the "Sultan of Currencies." He once turned the legendary investment bank Salomon Brothers into the world's largest foreign currency trading operation. Today Lipschutz runs his own hedge fund, which specializes in currencies.

"I still approach the market the same way. I still approach it as a 24/7 market," says Lipschutz. He trades almost constantly, even at home in his apartment in New York's trendy NoHo district, where there are monitors everywhere. Every night, Lipschutz gets up at two or three in the morning to see what is happening on the European markets.

Europe is indeed currently the hottest topic on the global financial markets. The value of the battered euro has been falling since the Greek government confessed to the actual scope of its debt - and since it became clear that things are not looking significantly better in the other PIIGS countries (the acronym refers to Portugal, Ireland, Italy, Greece and Spain).

There has never been this much uncertainty. No one knows whether the Greeks will manage to solve their problems, whether and how other countries will come to their aid, whether the crisis can be confined to Greece or whether it will spread like wildfire among the PIIGS - and end up tearing apart the European currency union.

All of this translates into excellent opportunities for foreign currency traders and speculators. They can either bet on a decline of the euro or a bailout for the Greeks in the form of a rescue effort by other euro zone countries. In the first case, the price of Greek government bonds will hit rock bottom, and in the second case it will rise.

These are the kinds of conditions that make it possible to make a lot of money quickly - but with devastating consequences, because speculators amplify trends and increase risks. If they bet on a Greek bankruptcy, it will become even more difficult, and expensive, to attract fresh capital. This could lead to a national bankruptcy or the feared conflagration - or even the collapse of the euro.