A strong euro will boost the risk of default in countries such as Portugal and threaten Europe’s monetary union as the region’s central bank prepares to raise interest rates, according to Brown Brothers Harriman & Co.
“We are going to see some kind of default -- clearly, markets and investors are not going to get closure until some sort of debt restructuring happens,” Lena Komileva, London-based global head of G-10 strategy at the firm, said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “The strong euro will only increase the risk of default over time.”
The euro has gained 2 percent over the past month, according to Bloomberg Correlation-Weighted Currency Indices, a measure of 10 developed-nation currencies. It has rallied on speculation the European Central Bank will raise its key rate in April to curb rising prices. Inflation in February was 2.4 percent, exceeding the ECB’s 2 percent limit for a third month. The shared currency fell 0.2 percent today to $1.4147.
Ireland, Greece and Portugal could “become more solvent” if Europe’s monetary union accepted a higher inflation rate of 3 percent to 5 percent and a weaker euro to reduce the value of unsustainable sovereign-debt levels, Komileva said. Without a falling 17-nation currency, she added, the currency union may fracture.
“We’ll either have the euro at current levels, and the euro zone not remaining in its entirety over the coming decade,” she said. “Or we’re going to have the euro cheapen much further as default risks ultimately are priced in.”
European leaders at a summit in Brussels that ended today cut the startup capital for the future euro emergency-aid mechanism. Fitch Ratings and Standard & Poor’s yesterday downgraded Portugal’s sovereign-credit ratings.
The euro has strengthened against all of its 16 most-traded counterparts this year. Komileva predicted it will gain versus the dollar to $1.44 before falling below $1.38 by year-end.