Economist: Euro break up, what would happen to deposits

Lightning · 4 Dec 2010

There have been a number of threads here about the potential for the break up of the Euro and the impact on people's deposits.

There are those that think such an eventuality is highly improbable, and those who think it is a matter of months away.

Either way, this weeks Economist magazine article on this topic makes a very interesting read:
http://www.economist.com/node/17629757

How would it be done?

The changeover would have to be swift and complete to limit financial chaos. Bank deposits would have to be converted at the same time, and the same rate, as overdrafts and mortgages to keep the value of banks’ debts in line with their assets. When Argentina broke its peg with the dollar in 2001, it decreed that bank deposits should be switched at a more favourable exchange rate than loans, in an effort to appease savers. This imposed losses on an already crippled banking system, and led to a sharp contraction in domestic credit.

The central bank would have to distribute new notes and coins fast. It would also have to set interest rates, and would need a lodestar, probably an inflation target, to guide it. Whatever the official exchange rate at a changeover, the new currency would quickly find a market level against the euro and other currencies. A new D-mark would be expected to rise against the now-abandoned euro; a new drachma or punt would trade at a big discount to its official changeover rate—a devaluation, in effect.

The switch to the euro was smooth, but it was planned for years in great detail and in co-operation among countries. The reverse operation would be far messier.The mere prospect of euro break-up could cause bank runs in weak economies as depositors scrambled to move savings abroad to avoid forced conversion. If Germany were the leaver, it would face an inward flood.

To prevent such a drain, a weak country thinking of leaving the euro would have to impose caps on bank withdrawals, other forms of capital controls, and perhaps even restrictions on foreign travel. That might not work in a region as integrated as Europe—and if it did it would depress the economy by limiting the circulation of cash for commerce. It would also cut the country off from foreign credit, because foreign firms and banks would fear that their money would be trapped. Trade would suffer badly, at least for a while.

Is this really likely?

The spectre of bank runs, high funding costs, default and social unrest might not seem so scary in today’s conditions: some countries are already vulnerable to these. Efforts to ameliorate these problems have so far proved inadequate. Therein lies the danger for the euro.The cost of breaking up the single currency would be enormous. In the ensuing chaos and recrimination, the survival of the EU and its single market would be in jeopardy. But by believing that a break-up cannot happen, the euro zone’s authorities will always tend to stop short of the radical measures needed to hold the project together. Given the likely and devastating chaos, it would be a mistake for a country to choose to leave. But mistakes occur in times of stress. That is why some are beginning to contemplate the unthinkable.

Some of the highlights from the article, are what many AAM posters have highlighted about the potential for deposit controls, the movement of deposits abroad etc.

As Godfather has mentioned, and the Economist has said, if you think a Euro break up is likely, then the best place to have deposits is Germany, as a new German currency would soar after conversion but New Irish Punts would devalue, reducing the value of your savings.

I think the euro break up still seems unlikely, but as the sovereign debt crisis evolves it seems increasingly plausible.

Expat64 · 5 Dec 2010

I think that a 'hard' Euro will most likely have the following members: Germany, France, Netherlands, Luxembourg, Austria and Finland. Sweden and Denmark may well join it.

Belgium may not remain in the Euro, so those who have money in KeyTrade Belgium may want to shift some of it to KeyTrade Luxembourg.

It might be worth seeing if there is a way of transferring funds from RaboDirect (in Ireland) to Rabo Bank proper. (In the Netherlands).

Kev · 5 Dec 2010

Is it worth echanging euro into sterling now or wait until the next year.

bluemac · 5 Dec 2010

in September we all thought the idea of the IMF being here was unlikely, maybe even unthinkable.

Godfather · 5 Dec 2010

CiaranT said:
As Godfather has mentioned, and the Economist has said, if you think a Euro break up is likely, then the best place to have deposits is Germany, as a new German currency would soar after conversion but New Irish Punts would devalue, reducing the value of your savings.

Thank you CiaranT, when I raised the same question in an italian forum people thought I was getting mad or depressed...

I see people are starting to believe in my theory.

Without more political, taxation and flag+army armonization (accompaigned by stronger sense of nation) people can rebel against this "different speed" monetary union.

We are not in the US, differences in languages and culture still prevail and people can see Bruxelles as too far away from the true problems...

spreadsheet · 5 Dec 2010

I remember thinking The Economist were overstating the property bubble...

Duke of Marmalade · 5 Dec 2010

A fairly good article.

Economist said:
Given the likely and devastating chaos, it would be a mistake for a country to choose to leave. But mistakes occur in times of stress. That is why some are beginning to contemplate the unthinkable.

I agree with this frightening conclusion. A huge mistake could be made out of sheer frustration and fuelled by false prophets such as David McWilliams. Read the article again. The only gain is that we would become more competitive. All else is chaos. Up to now I have been insisting to AAMers that it won't happen. My argument has been that it just doesn't make sense. I never thought of the point that this of itself does not preclude it from being embarked upon.

old westie · 5 Dec 2010

I think the Duke is being slightly over optimistic which i would love to be,but would a transfer of our money to sterling accounts either in N Ireland or mainland England not be much more simple and easy ??

PaddyBloggit · 5 Dec 2010

Ireland 'likely' to leave Euro

[broken link removed]

kev53 · 5 Dec 2010

CiaranT said:
bank deposits should be switched at a more favourable exchange rate than loans, in an effort to appease savers.

Would this not be a positive thing?? and encourage depositors to stay put?

Lightning · 6 Dec 2010

old westie said:
I think the Duke is being slightly over optimistic which i would love to be,but would a transfer of our money to sterling accounts either in N Ireland or mainland England not be much more simple and easy ??

Simpler than ooening an account in Germany? yes, but you take on GBP/EUR FX risk.

CreNaCille · 6 Dec 2010

Future of the euro

Economist article on The future of the euro.

Alfatronic · 6 Dec 2010

Expat64 said:
I think that a 'hard' Euro will most likely have the following members: Germany, France, Netherlands, Luxembourg, Austria and Finland. Sweden and Denmark may well join it.

Belgium may not remain in the Euro, so those who have money in KeyTrade Belgium may want to shift some of it to KeyTrade Luxembourg.

It might be worth seeing if there is a way of transferring funds from RaboDirect (in Ireland) to Rabo Bank proper. (In the Netherlands).

Does Luxembourg have a deposit guarantee scheme?

hand_m · 10 Dec 2010

What will happen to Euro Accounts in Northern Ireland.

What is likely to happen to Euro deposit accounts in Northern Ireland if.:
1. Ireland leaves the Euro and goes to an Punt Nua.?
2. The Euro itself breaks up.?

Godfather · 10 Dec 2010

Back to the old times in which depreciation of a currency was helping with the exports... I think that's the best option instead of increasing potential riots in Europe...

And I'm a nostalgic of the Liras with our italian artists and of the Punts with the images of Irish heroes...

Lightning · 10 Dec 2010

hand_m said:
What is likely to happen to Euro deposit accounts in Northern Ireland if.:
1. Ireland leaves the Euro and goes to an Punt Nua.?
2. The Euro itself breaks up.?

It depends on where the Euro is actually held.

Normally, a UK bank does not hold Euro in the UK, even if they offer a Euro account.

The UK bank holds Euro via a sub custodian or via an agent or via another bank that is based somewhere inside the Euro Zone.

The bank should be able to tell them who their bank is inside the Euro Zone and where they are based.

Ethan 1 · 11 Dec 2010

hand_m said:
What is likely to happen to Euro deposit accounts in Northern Ireland if.:
1. Ireland leaves the Euro and goes to an Punt Nua.?
2. The Euro itself breaks up.?

I would think Sterling would also suffer a sizable devaluation, given the exposure English banks have to the Irish economy. Why else did they recently offer a sizable bi-lateral loan .

On a side issue, Bank of Ireland branches in the UK are now regulated by the UK regulator, since the 1st of Nov. Does anyone know the significance of this?

Lightning · 11 Dec 2010

Ethan 1 said:
On a side issue, Bank of Ireland branches in the UK are now regulated by the UK regulator, since the 1st of Nov. Does anyone know the significance of this?

Interesting, do you have a link?

Ethan 1 · 11 Dec 2010

[broken link removed]

but then I found this. So maybe nothing to be concerned about.

http://www.reuters.com/article/idUSLDE63O0IP20100426

Ethan 1 · 11 Dec 2010

I wonder if people moving their savings offshore are aware of the FX risk they are taking, If Germany was to exit the € and reintroduce the DM, would they not be better off with a lower exchange rate, as one of the worlds largest exporters.

Also "Exchange Controls" could make bringing funds back difficult.

FX trading is not for the faint hearted, people need to get professional advice.

Economist: Euro break up, what would happen to deposits

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