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?
Is this really likely?
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.
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.