Stronger Euro May Signal Market Sees Greek Exit, Hambros Says

The strengthening euro this year may signal investors already expect Greece to leave the currency group, according to the investment chief of the U.K. private banking arm of France’s Societe Generale (GLE) SA.

The euro has gained 6.6 percent against the dollar since Jan. 3, making it the best performer among major currencies, according to data compiled by Bloomberg. At the same time, the situation remains “dismal” for peripheral members such as Greece and Ireland, said Andrew Popper, chief investment officer of SGPB Hambros.

“Things are not getting better in the euro zone but the euro is getting stronger, so it’s a mystery but perhaps the market expects countries like Greece to leave,” Popper said in a presentation at the firm’s Edinburgh office. “The euro zone is still the main risk we continue to face. It’s the only one that raises serious doubt about what happens in the market.”

European Central Bank officials ruled out a Greek debt restructuring, with executive board member Juergen Stark saying today it would be a “catastrophe.” The position is at odds with European politicians who have mooted the idea of extending the debt-repayment schedule as Greece struggles with the terms of last year’s 110 billion-euro ($156 billion) bailout.

Greek 10-year government bonds yielded 15.80 percent today, 1,271 basis points, or 12.71 percentage points, more than German bunds of a similar maturity. That so-called spread compares with 728 basis points for Ireland, which agreed a bailout in November, and 606 basis points for Portugal, which inked a 78 billion-euro rescue package this week.

‘Risk of Contagion’

“It’s nearly certain” that the maturity of Greece’s debt will be lengthened and there’s a “strong possibility” of bondholders taking a loss and a “risk of contagion” to Ireland, according to Popper, who will step down this year.

Greece may benefit in the short term from leaving the euro, even if that means remaining locked out of the international bond market for a decade like Argentina previously, he said. There’s less than a 50 percent probability that will happen and is an “extreme case scenario,” he said.

“The Greek people will be better off if Greece leaves the euro” because they can avoid harsh austerity measures, Popper said. “It’s better leaving the euro than never having the chance to recover because of their over-valued currency.”

Popper is responsible for about 4 billion pounds (6.4 billion) of investments. SGPB Hambros remains “relatively positive” on stock markets, preferring U.S. and Germany to emerging markets, where they have reduced exposure, he said.

To contact the reporter on this story: Rodney Jefferson in Edinburgh at r.jefferson@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.