The Impact of a Sovereign Default within the Euro Zone on the Exchange Rate

23 Pages Posted: 12 Oct 2012

See all articles by Arne Breuer

Arne Breuer

University of Hohenheim

Oliver Sauter

University of Hohenheim

Date Written: August 30, 2012


We use quanto credit default swaps to analyze the impact of a credit event in the Euro zone on the Euro-Dollar exchange rate. In light of the European debt crisis, market participants are willing to pay more for protection against a sovereign credit event if the payment in such an event is denominated in US-Dollar rather than in Euro, because they expect the Euro to depreciate in the wake of the credit event. We use this CDS price difference to calculate the implied change of the exchange rate conditional on a credit event of a member of the Euro zone. We find that the implied effect is quite heterogeneous across the different countries. In addition, we identify three country groups for which the implied effect on the exchange rate developed similarly over the time horizon of our data set.

Keywords: sovereign default, credit default swap (CDS), Euro zone, exchange rate

JEL Classification: E6, F3, G1, G2

Suggested Citation

Breuer, Arne and Sauter, Oliver, The Impact of a Sovereign Default within the Euro Zone on the Exchange Rate (August 30, 2012). Available at SSRN: or

Arne Breuer

University of Hohenheim ( email )


Oliver Sauter (Contact Author)

University of Hohenheim ( email )

Fruwirthstr. 48
Stuttgart, 70599

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