The Redenomination Risk of Exiting the Eurozone: An Estimation Based on the Greek Case

18 Pages Posted: 27 Jul 2018

See all articles by Costas Lapavitsas

Costas Lapavitsas

University of London, School of Oriental and African Studies (SOAS) - Economics

Date Written: May 2018

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.

Suggested Citation

Lapavitsas, Costas, The Redenomination Risk of Exiting the Eurozone: An Estimation Based on the Greek Case (May 2018). European Law Journal, Vol. 24, Issue 2-3, pp. 226-243, 2018, Available at SSRN: https://ssrn.com/abstract=3220758 or http://dx.doi.org/10.1111/eulj.12276

Costas Lapavitsas (Contact Author)

University of London, School of Oriental and African Studies (SOAS) - Economics ( email )

London, WC1E 7HU
United Kingdom

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