Demand to sell options on the Euro as bank losses mount

Premiums on euro put options have risen to the highest in almost a month as the European currency trades near the lowest since November on concern the region’s banks will report increasing losses. Moody’s Investors Service said on Feb. 17 it may cut the ratings of several banks with units in Eastern Europe that are coming under “downward pressure,” citing weakening economies that may undermine the parent companies.
“The possibility of defaults or ratings downgrades in Europe combined with the euro’s break below technical support makes it very easy for the currency to continue its fall,” said Yuji Saito, the head of the foreign exchange group at Societe Generale in Tokyo. The EUR/USD is currently trading at $1.2635 as of 8:30am, GMT.

U.S. regulators are being forced to sell the assets of failed banks at a discount to lure buyers spooked by the likelihood of increased loan losses amid a deepening recession. The assets of four banks have been sold to healthier rivals at a combined discount of $107 million this year, the Federal Deposit Insurance Corp. said. The FDIC had to offer a discount just once in 2008, when it engineered 25 bank takeovers. “There are situations where the government will write you a check to complete a deal,” said Peter Stanton, president of closely held Washington Trust Bank. “There is always value in there if you are willing to go in and work for it.”

Few companies will be immune from the impact of steep exhange rate falls late last year, which could raise a warning signal for some credit ratings, Moody's Investors Service said in a research note on Thursday. Sterling, for example, suffered a virtually unprecedented drop in its exchange rate late in 2008, while the euro and U.S. dollar and some emerging market currencies were also very volatile. This volatility could mean deteriorating operating margins and cash flow-ratios for some companies. Emerging market companies that have borrowed in dollars, but have to repay debts in local currencies will face a mismatch between earnings and debt. "Any resulting deterioration in leverage and cash-flow ratios raises a real red flag for credit analysts," Philip Robinson, analyst at Moody's, said in the research report. The GBP/USD is currently trading at $1.4360 as of 8:40am, GMT.

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