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Monday, December 05, 2011

FT Alphaville: Post-euro currency values

by Calculated Risk on 12/05/2011 09:43:00 PM

I've been wondering how weak the drachma and other currencies would be if there was a break up of the eurozone. The following is just a rough estimate ... but imagine how much more expensive gasoline will be in Greece?

Note: I've added FT Alphaville feeds to the sidebar. It is a must read on the European financial crisis.

From Joseph Cotterill at the Financial Times Alphaville: Post-euro currencies, charted

Along with “redenomination risk” for eurozone financial assets, this is another of those pieces of bank research that’s as interesting for being considered necessary to be written in the first place, as much as for its conclusion.

(Yes, we know it’s a dampener to talk about a euro break-up when the German and French governments are promising European unification, sweetness and light on a scale not seen since Charlemagne. But since it really is about either complete fiscal union, or this – it’s worth noting.)
Post-Euro currencies Click on graph for larger image.

Once again it’s Nomura taking the plunge on covering the break-up issue. In his December 4 note, the bank’s FX analyst Jens Nordvig warned that conclusions about the value of a post-euro currencies would have to be extremely provisional:
... we want to stress up-front that these estimates are unlikely to be particularly precise. They are intended to give a sense of potential magnitudes involved over a 5-year forward time frame, after which we believe temporary transition effects should be smaller.
A eurozone break-up will create additional short-term risks and require new risk premia for investors. These extraordinary risk premia will vary by country depending on factors such as market volatility, liquidity conditions, as well as issues relating to capital controls, including possible taxes on capital flows. Since our analysis is focussed on equilibrium considerations over a 5-year period, we will not focus directly on these more temporary effects, although we recognize that they could be crucial in the short-term.