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

Changing a country’s currency involves a “redenomination risk” arising due to assets and liabilities 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 a Public, a Private, a Banking and a Central Banking sector, 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