In this piece we look at the mechanics of a currency breakup and how it would happen. This piece is longer than most of our pieces and is a slightly more wonkish piece than usual, but the first two pages provide a summary of the entire piece. We look at previous currency breakups, how they happened, and what the consequences are and what the likely outcome is economically for any periphery country that exits the euro.
HIGHLIGHTS
> The breakup of the euro would be an historic event, but it would not be the first currency breakup ever
> Previous currency breakups and currency exits provide a roadmap for exiting the euro
> Peripheral European countries are suffering from solvency and liquidity problems making defaults inevitable and exits likely
> The euro is like a modern day gold standard where the burden of adjustment falls on the weaker countries
> Withdrawing from the euro would merely unwind existing imbalances and crystallize losses that are already present
> Defaults and debt restructuring should be achieved by exiting the euro, re-denominating sovereign debt in local currencies and forcing a haircut on bondholders
> All local private debts could be re-denominated in local currency, but foreign private debts would be subject to whatever jurisdiction governed bonds or bank loans
> The experience of emerging market countries shows that the pain of devaluation would be brief and rapid growth and recovery would follow
VP – February 2012 – Eurozone Breakup – Summary
