Directions: In the passage given below there are 10 blanks. Every blank has five alternative words given in options (A),(B),(C), (D) and (E). You have to tell which word is APPROPRIATE according to the context. Mark that inappropriate word as your answer. If all options are correct, Mark E as your answer.
How do you solve a problem like Marine? Ms Le Pen, leader of France’s far-right National Front, has ___1____ that she hopes to reintroduce a national currency if she is elected president in May. In a recent speech, she suggested that government bonds would be redenominated in francs instead of euros.
The proposal was dressed up in technicalities. The franc would be revived as a “parallel” currency for official transactions and used alongside the euro in a version of the systems (the snake and the exchange-rate mechanism) that existed in the 1970s and 1980s. Such schemes ___2____ European currencies together but were subject to regular crises, with France periodically devaluing the franc.
Investors would pretty quickly see through the ___3____. There is not much point in bringing back a national currency unless you want the right to devalue it. And there is not much point in redenominating government bonds in francs unless you want to pay creditors back less than they expected. (This might technically count as a default, according to Moody’s, a rating agency; it depends on the exact circumstances.) If that happened, it could ____4_____ an enormous financial crisis in Europe. After all, if France were to devalue, what would stop the Italians or the Greeks from following suit?
It all makes for a tricky calculation for investors, multiplying the probability of a Le Pen victory against the potential decline in the value of French bonds if it occurs. The ____5____ is that, even if Ms Le Pen makes it through to the second round of the presidential election, she will be defeated easily. That is what happened to her father in 2002, when voters united around the conservative Jacques Chirac. Gamblers put the ____6_____ of a Le Pen victory at around 30%.
Even if she wins, she might not be able to implement the policy she ____7____. Reintroducing a national currency could involve leaving the EU. That would be a huge step; only a fifth of French people think it will happen in the next ten years.
Still, in the wake of the Brexit and Trump votes last year, some investors will be nervous about another surprise. “I’m not certain that we should be quite as comfortable as the polls suggest given the history of the past four to five years,” says Simon Derrick, a strategist at BNY Mellon, a bank. If Ms Le Pen is pitted against François Fillon, a Thatcherite conservative, in the second round, left-wing voters might stay at home.
To understand the scale of the potential decline, think back to the late 1990s and the era of the “convergence trade”. As the introduction of the euro ____8_____, investors realised that the currency risk of owning European bonds would disappear. So it became much cheaper for many European countries to borrow. In the early 1990s Italy often had to pay four percentage points more than Germany to borrow, and France more than one percentage point.
Were currency risk to return, then spreads would widen again. That happened during the euro crisis of 2011 and 2012 and it took determined action by the European Central Bank (ECB) to bring them back down. There are already some signs of French yields edging up, relative to those in Germany, with the ____9____ at a three-year high because of political risk.
If currencies were to FLOAT again after such a long period, a big adjustment would be needed. Since 1999, unit labour costs have risen by 32% in France but by just 15% in Germany (see chart). Making French workers competitive again could require a 12% devaluation.
Even if that figure is too large, imagine what would happen if the Le Pen plan were implemented. Investors would flock to the safety of German government bonds. They would be happy to accept negative yields of 1-2%, given the scope for much larger losses from holding French assets. The revived franc would come under immediate selling pressure as investors ____10____ their risk.
Countering that selling pressure would involve one of three things. First, the French government could sell euro assets and buy its own bonds. But it doesn’t have enough reserves to sustain that policy. Second, the French could raise interest rates to attract capital. But that would damage the economy, hardly the outcome Ms Le Pen is seeking. Or, third, the ECB could step in to buy French bonds. But it wouldn’t do so if France seemed to be heading out of the euro.
It would all be an enormous mess. So long as the probability of a Le Pen victory is still low, markets won’t shift much. But if her victory chances rise to 40% or so, prepare for a turbulent spring.
proclaimedexplainedindicatedspelled outAll are correctOption C
fetteredtiedengageemancipatedAll are correctOption B
ransomconfinefetterfacadeAll are correctOption D
step-upinstigatetriggerenergizeAll are correctOption E
diversiondissentconsensusconflictAll are correctOption C
prospectoddscontigencyconditionalAll are correctOption B
objectsfrownsfavoursdisparagesAll are correctOption C
entershove offlight outapproachedAll are correctOption D
spreadholdshroudslatherAll are correctOption A
stumbledhedgedcushioneddraggedAll are correctOption B