1 March 2011 Insurance

The end of the eurozone?

After 11 years of operation, the euro faced unprecedented pressures during 2010 that challenged its existence. With Greece and Ireland having required rescue packages, and with Portugal trading at levels many view as unsustainable at the time of writing, there are fundamental questions over the euro’s future direction and composition.

For political risk insurers, a major change in the eurozone could impact both on claims and on currency risk management, under a range of scenarios. Claim volumes are largely manageable, demand for political risk insurance (PRI) is high and new entrants into the market have brought new capacity.

Where next for the euro?

In looking for lasting solutions for the euro, the key choice is whether to integrate more, continue the current ad hoc process of stabilisation and increased fiscal rectitude, or separate. Separation could take many forms, including an orderly exit strategy just for Greece, the introduction of a two-tier euro, or multiple defaults and devaluations.

Scenario 1

Co-ordination…and muddling through

This involves continuing the policy of intervention to aid struggling countries, along with some fiscal supervision to impose basic discipline, especially in the weaker states. A range of ‘interim’ measures, such as ECB-subsidised lending to banks and the repurchase of government debt as collateral by the ECB, are being used to counterbalance severe funding problems for weaker countries—in most cases, accompanied by serious weakness within their financial systems.

Positives

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