The redenomination risk of exiting the Eurozone: An estimation based on the Greek case

Abstract

Changing a country's currency involves a redenomination risk arising due to assets and liabilities that are impossible to redenominate because of contracts governed by foreign law. Depreciation or appreciation of the new currency could, therefore, result in losses or gains, thus creating a risk for economic agents. The risk can be estimated by splitting the economy into public, private, banking and central banking sectors, and summing up exposed aggregate assets and liabilities. This method is applied to Greece showing that exiting the EMU would certainly entail forbidding redenomination losses for the Greek public sector, leading to default. Surprisingly, however, the impact on the private and the banking sectors would actually be positive (gain). The impact on the Bank of Greece would be ambiguous depending primarily on the legal status of TARGET2 liabilities. It is notable that even the Bank of Greece possesses a significant cushion in the form of bonds under foreign law. In all, the redenomination risk for the Greek economy is modest, with the exception of the public sector.

European Monetary Unification through Novation. The Political Economy of the TARGET System

“…As a result, we provide a macro-financial approach to monetary unification from a payment system perspective that contributes to the burgeoning IPE literature on the politics of central banking in Europe. This literature has addressed important topics such as market neutrality (van 't Klooster and Fontan 2020), securitization and repo markets (Gabor and Vestergaard 2018;Braun 2020), risk management (van 't Klooster 2022), unconventional monetary policy (van Doorslaer and Vermeiren 2021), communication (Diessner and Lisi 2020;Moschella, Pinto, and Diodati 2020), democratic accountability (Collignon and Diessner 2016), and the costs of exiting the Euro (Lapavitsas 2018;Durand and Villemot 2020). Ultimately, our focus on the monetary plumbing offers a new dimension for the study of regional fiscal and investment policies (Mertens and Thiemann 2018;, both carried out through the payment system outlined here.…”

“…There is widespread legal ambiguity on whether TARGET2 balances would remain denominated in EUR or could be redenominated in the new currency of the exiting member (Lapavitsas 2018). The issue boils down to the contradiction of the legal jurisdiction over the TARGET2 system: TARGET2 jurisdictions and the operational modules of the SSP are owned by their respective NCBs and remain legally separated and under the national law of their geographical location.…”

Risk premia and the European government bond market: new empirical evidence and some thoughts from the perspective of the life insurance industry

“…2017 ). A member state that is leaving a currency union because of, for example, fiscal problems or a very strong currency that is hurting the international competitiveness of the respective state’s domestic economy, could decide to introduce a new currency and to redenominate its outstanding government bonds that are not governed by foreign law (see, for example, Grund 2017 and Lapavitsas 2018 ). This measure of economic policy would most certainly affect investors that hold these fixed income securities in a negative way because the new currency of the country leaving the monetary union would likely devalue against the currency that is still used by the states that remain in the currency union.…”

Pengujian Resiko Redenominasi terhadap Nilai Tukar Rupiah

“…Penerapan redenominasi berdampak besar terhadap seluruh agen ekonomi. Resiko yang dihadapi akibat penerapan kebijakan itu bisa diukur dengan memecah ekonomi ke dalam beberapa bagian: publik, swasta, perbankan, dan bank sentral (Lapavitsas, 2018) (Erce, 2014).…”