Re: Re: Demise of the Euro closer? – Ignore this if it bores you

#105729
peterhun
Participant

read the whole post at FT, however, this seems most relevant

There are two ways a breakup could happen, writes JPMorgan. First, a Germany-led northern exodus which leaves the periphery with a rump currency led by France. Second, a periphery-led southern exodus which leaves the north with a rump currency led by Germany.

Either way, it’ll be messy (our emphasis):

For one, exit would take time. There is no legal provision for leaving the euro without leaving the European Union itself, meaning that EMU exit would have to be negotiated multilaterally, then ratified domestically (via parliamentary debate or a referendum). In that time, bank deposits would flow out of a country if its new currency was expected to depreciate, and vice versa. The only way to stop this would be an extended bank holiday or capital controls.

JPM notes how after the break-up of Czechoslovakia, the two countries agreed to maintain a currency union but Slovaks moved money into Czech countries anyway, on the assumption that their new country would devalue. The union lasted all of six weeks.

Then there’s the legal issue: JPM cites this paper to argue that domestic law debts would probably be redemoninated to the new currency whereas those contracted under English law will probably remain denominated in rump euros.

Possibly relevant, if a cds event is not required, then its more likely to happen.

All this sovereign turmoil is just what credit default swaps are designed for, right? Well, JPM points to an interesting technicality that’s also worth bearing in mind should the improbable happen and you’re hedging against the reemergence of the Italian lira (our emphasis):

A quirk of CDS contracts is that a change of currency is a restructuring credit event, except if the new currency is the legal tender of a G-7 country (including Italy) or a AAA OECD country. Thus we believe CDS would be triggered if corporate, bank or government bonds were redenominated to Drachma, Punt, Escudo, Peseta or Belgian Franc, but not if they were redenominated to a newly-reintroduced Italian Lira

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http://ftalphaville.ft.com/blog/2011/09/08/672831/jpmorgans-alternate-eurozone-free-universe/

On my opinion a breakup of the Euro will happen overnight. I cannot see how country can be forced to keep using a currency. If its a long legal process capital controls will be used, for sure.