Derivatives Traders Make Plans for Government Exit From Euro, ISDA Says

The implications of a government leaving the 16-nation euro area are being explored by dealers, according to the International Swaps & Derivatives Association.

Europe’s budget deficit crisis triggered speculation one or more of the region’s most indebted nations may quit the euro. Italy, Spain, Ireland, Portugal and Greece could become more competitive if they returned to their own currencies, which may depreciate and allow exports to expand.

“While it expresses no view as to the likelihood of such an event occurring, ISDA has established a discussion group to explore the different scenarios in which a country may leave the euro zone,” Rebecca O’Neill, ISDA’s spokeswoman in London, wrote in an e-mailed statement. It will “consider what legal and documentation issues could arise in each for the OTC derivatives markets and what steps would be necessary in order to address them,” she wrote.

German Chancellor Angel Merkel and French President Nicholas Sarkozy blamed derivatives such as credit-default swaps for worsening the fiscal crisis. Germany curbed trading of some debt and euro-currency contracts in May to ease selling pressure on the region’s bonds and currency.

The story was earlier reported by the Financial Times.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or the weather. So-called over-the-counter derivatives aren’t traded on exchanges.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

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