The Hare and the Tortoise22. October 2012 by Herman Brodie
In April 2010 intrade.com, the spread-betting website, launched a new contract that allowed punters and pundits to bet on the breakup of the eurozone. More precisely: “any country currently using the Euro to announce intention to drop it before midnight ET 31 Dec 2012.” It immediately changed hands at 27 (per cent probability) and scarcely ever saw any price below 20 in the subsequent two years. Last autumn it reached a peak of 60. Today, it trades at 10. Time is obviously running out on the breakup believers, but is the tide running out on them too? This is not InTrade’s only ‘eurozone breakup’ contract; the website offers identically phrased bets with expiries in 2013 and in 2014. Both of these contracts also peaked in autumn of last year. Thanks to the time they have left to run – time during which any number of calamities could unfold in the eurozone – their prices have not crumbled like the 2012 contract. Clearly though, something has changed.
Crisis resolution may not have advanced as far as German Chancellor Merkel (‘euro is more stable’) or French President Hollande (‘worst is over’) might like to believe, but one need only note the context of the recent EU27 meeting to recognise how things have moved on. For example, this is the first Heads of State summit in the last few years, where EU leaders spent more time crafting new long-term policies and on buttressing old ones, than on fighting fires. It was also the first where governments announced in advance that no decisions would be made and investors didn’t seem to care. What’s more EU leaders’ capacity to surprise the markets has improved. Already on the first day of the two-day meeting an agreement on banking supervision was reached without the need for any midnight oil to be burned. And, recently, an unexpected consensus was found on the introduction of a financial transactions tax.
The momentum seems almost unstoppable. At the start of this year political commentators bemoaned the short half-life of EU summits and openly mocked leaders who invariably sought to unpick deals as soon as they were made, undermined them with dismissive statements as soon as they returned to their respective constituencies, or who simply seemed not to understand what had been agreed upon. Investors then rounded on the peripheral bond markets and trashed the euro. Now when the Finnish finance minister announced that Greece would likely leave the eurozone within six months just days before the EU summit, financial markets simply shrugged. Of course, there have been some very important developments in the meantime. Mario Draghi’s by-any-means-necessary speech and the promise of unlimited bond purchases by the ECB are among them. The most telling development, however, probably took place back in March when Greece restructured its debt. Above all others, a debt write-down was the event that back in 2010 speculators thought would precipitate a euro breakup. Now, the evidence is that a debt default by a eurozone country is possible without it having to surrender its membership.
These creeping changes in perception do not mean the risk of a euro breakup has been erased, or even reduced. There are still countless economists (and spread-betters) who are convinced the monetary union is doomed to destruction in the near future. Just a fortnight ago, George Soros published his latest treatise arguing for the exit of Germany from the currency bloc. However, economic reasoning is not going to help those convinced of a break up to win a spread bet before midnight CET on December 31st.