EU Government Debt Question

Discussion in 'Economics' started by Highterm, Apr 20, 2010.

  1. Highterm


    A Hypothetical Question-

    If a European nation were to pull out of the EMU system (The Euro) what would be the likely outcome for it's Euro denominated debts?

    I'm specifically thinking about Germany.
    If, in the unlikely event, Germany were to withdraw from EMU, i would assume that it's new currency (New Deutch Marks?) would appreciate significantly against the Euro and probably to other currencies, such as the US$.

    What would be the effect on it's Euro denominated debt?
    If it were to devalue the debt, would this be considered a default? An act of war?
    Or would Germany transfer the Euro debt to New Deutch mark debt at an equal value to keep foreign investors whole?

  2. 1) Germany will invade that country?
    2) The debts would have to be "satisfied" somehow. Even then, that country will become a pariah and probably fall into civil war.
    3) It would be "better" if several countries collectively threaten to revert back to their "old" currencies in order to abandon the euro-currency. :( :eek: :D
  3. Because Germany is a G7 nation and a core member of the Eurozone, Germany will probably be able to re-denominate its bonds to NeueDM at very little cost to itself.

    A re-denomination like this by a G7 country is not considered a sovereign default, according to ISDA definitions for sov CDS (but, then again, that's not saying a lot).

    It's very likely that Germany will make sure that investors are not hurt in this re-denomination, given that a) it's in Germany's interest to retain access to capital mkts; b) it's likely not going to cost the country a lot, given that there will be demand for NeueDM debt.

    This reasoning is why there have been some commentators recently (Martin Wolf of the FT, Stanley economists) suggesting that a German exit from the EU is possible, if not likely.
  4. I am writing a paper about the aggregate demand limitations of the EU. It is not viable in the long term.