In June, after explaining why Bitcoins were an overrated fad at best and a truly awful idea for a currency at worst, I conclued “Now I just need to find a way to short Bitcoins.“Check out the price dropping from aroudn $30 to below $5.
Bitcoin price plummets since June
Although the original and long-planned date for the Gulf Monetary Union’s single currency was 2010, I’m putting my neck out once again and predicting that a currency union of all the current GCC countries won’t happen by end 2015.
There are too many political problems, too much fallout from the Euro and, frankly, too many good reasons not to do it. In some ways, Saudi Arabia may exert enough pressure in the region to make it work, but for the same reason I suspect some may be wary of Saudi gaining any more leverage.
Recent article on the history of words for currencies in Europe, the Middle East and the Subcontinent. The article takes the historical words and supposes maybe some of the words will need to be resurrected in the near future.
There’s been so much discussion about the Euro recently, with many people offering views on how we came to be where we are.
I’d suggest that giving the limitations of the Euro structure, the ECB mandate and most critically, the failure of the Euro region to sufficiently meet the characteristics of an Optimum Currency Area (OCA), the problems we are having now were inevitable.
The timing of the event may have been uncertain, but the probability of it happening was pretty close to 100%. Yes, it’s easy to say that now and I wasn’t saying it before, but consider these three issues:
Now, ask yourself, is East Africa ready for a currency union?
Is the GCC ready for a currency union (pdf)? More on this in the months and years to come I’m sure, on this blog and everywhere else.
Best practice for matching non-profit annuities in most countries, certainly from a risk perspective, is still to cash flow match (or at the very least, match key durations) using government bonds.
The theory is that the insurer isn’t then exposed to changes in the term structure on interest rates, only exposed to illiqudity/reinvestment risk to the extent of mortality fluctuations, isn’t exposed to currency risk and certainly isn’t exposed to credit risk. Without complex margining requirements like some swaps and without the need to roll cash investments over, government bonds should allow ALM teams to sleep well.
Now, Solvency II is likely to adopt a swap yield curve rather than bond yield curve. There are some good reasons here, including arguably fewer distortions from temporary supply and demand imbalances, improved liquidity and so on. The same yield curve is used for liquid liabilities so the allowance for an illiquidity premium over and above the swap curve at some times, in some ways and for some products is still under debate.
But what should Greek insurers do in the meantime?
Frankly, Greek government bonds don’t remove credit risk and the huge credit spreads on these instruments will create huge funding gaps and variability in earnings unless a Greek govi yield curve is used to value liabilities as well. It’s not clear at all that Greece will stay part of the Euro, so German government bonds don’t remove currency risk. German government bonds in any case are show signs of nervousness as yields creep up.
The swap market is exposed to the same Euro break-up risks as bonds. Which banks will survive, what happens to currencies in the meantime and what does that do to long-term Euro swaps? What about Euro-Sterling swaps issued by Greek banks (I’m not sure if these even exist though).
All in all, it’s good to be involved in ALM in South Africa, and even the Middle East just at the moment.
Italy’s yields are heading towards 8%, which is about the same as South Africa. And South African inflation is flirting with 6% while Eurozone inflation is looking more like 1%.
Europe is in serious trouble and very few South Africans have yet woken up to exactly how serious this trouble is.
[update: intrade betting has it more likely than not that at least one country will leave the Euro by December 2014. If one goes, it's likely more than one will.]
It’s becoming increasingly clear that Europe has a problem to which the solution will be world-changing. The way I see it, there are only two real possibilities:
The first is less likely that the second in my view, but also less dramatic in terms of impact. That first option probably results in more European integration, but with wide-ranging implications for international politics and the peripheral Euro countries. Belonging to the Euro would mean something far more substantial than the common currency they share now.
The second option would be the partial undoing of more than two decades of work to unify Europe.
I collected some old Zimbabwean trillion dollar notes as that currency was on its way out. It might be time to do the same for the Euro.
Hopefully this will caution others from ill-conceived ideas of adopting common currencies.
I wouldn’t want anything to do with any bank that has much at all to do with European banks or European sovereign debt. The old South African Rand is seeming like a safer relative bet than at pretty much any other time in the last decade.