Leaving a Mark on the Euro

46 Pages Posted: 1 Mar 2018 Last revised: 30 Apr 2018

See all articles by Lukas Kremens

Lukas Kremens

London School of Economics & Political Science (LSE)

Date Written: February 28, 2018

Abstract

I construct a time-series measure of currency redenomination risk in French and Italian government bonds based on different types of CDS contracts. Older contracts are not triggered by a redenomination into a newly issued French or Italian currency while newer contracts are. The risk of France or Italy leaving the Eurozone has substantial spill-over effects on other Eurozone sovereigns. German Bund yields respond negatively to increases in redenomination risk, indicating that "German" euros are becoming more valuable when the composition of the Eurozone is at risk. Most European sovereign bonds and the euro exchange rate depreciate with French, and appreciate with Italian redenomination risk. This discrepancy is consistent with the interpretation that French redenomination risk represents an existential risk to the Eurozone with subsequent redenominations in other sovereign bonds. In contrast, an Italian redenomination is likely to remain isolated and Italian redenomination risk lowers the yields on other periphery sovereign debt, which serve as substitutes to Italian bonds.

Keywords: Redenomination Risk, Credit Default Swaps, Sovereign Debt, Contagion, Exchange Rates

JEL Classification: E43, E58, F3, F31, F34, G01, G12, G15

Suggested Citation

Kremens, Lukas, Leaving a Mark on the Euro (February 28, 2018). Available at SSRN: https://ssrn.com/abstract=3132064 or http://dx.doi.org/10.2139/ssrn.3132064

Lukas Kremens (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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