Possible euro exits unsettling - and alluring - for market

Mon Nov 28, 2011 5:42pm EST
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By Steven C. Johnson

NEW YORK (Reuters) - News that the world's top foreign exchange broker has been testing its trading system against a possible euro collapse conjures a host of images and ideas for currency traders and investors, not all of them bad.

If one or more country ditches the euro, the revival of old currencies would mean more opportunity for profit in the $4 trillion-a-day FX market, traders say.

Yet establishing new exchange rates, sorting out how to settle trades and getting a handle on counterparty risk are enough to unnerve even the most intrepid of investors. The cost to nations of leaving the euro zone would be felt in reduced purchasing power that comes with a suddenly weak currency.

Banks with large foreign exchange dealing operations, including Barclays (BCS.N: Quote) and Citigroup (C.N: Quote), declined comment on whether they had tested their trading systems.

But a trader at a global investment bank told Reuters "that conversation is taking place. It (euro zone breakup) is not something we think is going to happen, but as a contingency, it's just prudent to look at all the options."

Markets got a reminder about the prospect of a smaller euro zone on Monday after ICAP IAP.L, the biggest forex broker, confirmed it had tested its EBS currency platform to ensure it could handle a Greek euro exit and a revival of its old currency, the drachma.

"No doubt it would be messy," said Jens Nordvig, global head of G10 currency strategy at Nomura Securities. "It could be very hard for the system to manage."

Europe's worsening debt crisis has markets on edge. Last week, poor bond auctions in Spain, Germany and Italy, which paid a euro-era high to finance short-term debt, suggested to some that markets were losing confidence in the entire euro project, which began in 1999.   Continued...