Bloomberg News

Fulcrum’s Davies Sees Risks in Betting Against Euro Over Crisis

June 21, 2011

June 21 (Bloomberg) Fulcrum Asset Management LLP’s Gavyn Davies said it’s risky to bet the euro will fall against other currencies as a result of the region’s sovereign debt crisis, because of the increasing likelihood that Greece may be forced to leave the currency.

For a trader who’s short the euro, “a blow up might really go against you,” Davies, whose hedge fund manages about $1.6 billion, said in an interview in Monaco today. “If the European Union actually expels Greece, the single currency is due to rise sharply.”

The International Monetary Fund, which has contributed one third of the money used to bailout Greece, Ireland and Portugal, has warned European leaders that a failure to resolve the region’s debt crisis risks triggering “large global spillovers.” Greek Prime Minister George Papandreou is trying to persuade his nation to accept a new 78 billion-euro ($112 billion) rescue package consisting of state asset sales and budget cuts.

The bailout will only temporarily help Greece, because it fails to recognize the nation is insolvent, Vikram Mansharamani, a Yale University lecturer, said today at the GAIM International hedge fund conference in Monaco.

“There is a confusion that’s taking place between liquidity and solvency,” said Mansharamani. Greece has “too much debt and the policymakers solution is to add a little more debt, because it sort of kicks the can further down the road.”

Traders to Profit

Davies, a former chief economist at Goldman Sachs Group Inc., in the interview said credit default swaps, not currencies, offer the best way for traders to profit from a view that Europe’s debt crisis will worsen. The swaps, which are tied to the value of bonds, rise in value when the perception that a borrower will default on its loans increases.

Davies, who’s based in London, declined to comment on whether Fulcrum is using CDS to bet against the sovereign debt of European nations. Davies, during a panel discussion at the GAIM conference with Mansharamani and Moore Capital Management LLC’s Jens Nystedt, said the way policymakers have handled the debt crisis has made him “very bearish” on Europe.

“They’ve continued to make loans with ever increasing obligations attached to countries that can’t now sustain the austerity measures,” he said. “They’ve turned it into a much bigger debt crisis than it was last year.”

--With assistance from Jon Menon in London. Editors: Jon Menon, Frank Connelly

To contact the reporter on this story: Jesse Westbrook in London at jwestbrook1@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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