# If the euro breaks up, what will be the value of the punt nua?



## Brendan Burgess (6 Dec 2011)

I posted before that Bank of America expects the punt nua, the German and the French currencies to rise if the euro breaks up. 

Nomura has produced a table of [broken link removed]
which is more in keeping with the popular view on the topic.

ING's view



|Nomura|BoA/Merrill Lynch|ING
Germany |+1%|+6%
Netherlands|-7%|+6%
France|-9%|-7%
Belgium|-24%|not given
Ireland|-28%|+9%|-25%I find it extraordinary that economists from such respected institutions could come up with such varied forecasts.


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## callybags (6 Dec 2011)

I think it shows that they haven't a clue. They are just guessing and hoping to be able to say "I told you. You should have listened to me instead of the rest of them"


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## frankmac (6 Dec 2011)

Am I reading correctly from that table that BOA are forecasting that the famous "punt nua" will increase in value by 9%?


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## Brendan Burgess (6 Dec 2011)

frankmac said:


> Am I reading correctly from that table that BOA are forecasting that the famous "punt nua" will increase in value by 9%?



Frank, that seems to be what they are saying. They say that it is the most undervalued of all the eurozone currencies. 

I find it hard to believe, but it is important because we all just assumed that it was risk-free moving your money to German euros. 

Brendan


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## callybags (6 Dec 2011)

> They say that it is the most undervalued of all the eurozone currencies.


 
This is the bit that always puzzles me. It applies to shares as well.

How can they be over/undervalued if the price on the day is all that the market will pay.


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## Brendan Burgess (6 Dec 2011)

callybags said:


> How can they be over/undervalued if the price on the day is all that the market will pay.



Your statement applies to shares ok. One stockbroker will designate BoI a buy while another will designate it a sell. 

This is quite different as there is no current market value for the punt nua, as there is no such currency. 

But maybe I should not be so surprised that economists differ on the punt nua's value,  if the stockbrokers differ so much as well.


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## chewchew (6 Dec 2011)

Sorry if this has already been posted. From the wall street journal website a couple of days ago:

http://online.wsj.com/article/SB10001424052970204826704577074773960813432.html


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## Calico (6 Dec 2011)

I think it's important to remember that we are talking about the initial devaluation/revaluation of any new punt. However, over the longer period any new currency will more than likely continue to steadily depreciate if we are ever to reduce our debt burden. (assuming that also is converted into punts...)


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## Brendan Burgess (6 Dec 2011)

chewchew said:


> Sorry if this has already been posted. From the wall street journal website a couple of days ago:
> 
> http://online.wsj.com/article/SB10001424052970204826704577074773960813432.html



Chewchew - that is very useful and I have incorporated a column for it.

I don't suppose you have a link to ING's research?


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## Lightning (6 Dec 2011)

This quote, from the Nomura report, summaries what they are saying about currency appreciation/depreciation ....



> Our estimates suggest significant depreciation risk for a number of eurozone countries in a redenomination scenario. *We estimate that this risk is in the region 60% for Greece, around 50% for Portugal, and 25-35% for a group of countries including Ireland, Italy, Belgium and Spain*. At the same time, our estimates confirm the common perception that a new German currency will fare better. In fact, our point estimates point to a slight appreciation potential, although it is marginal and economically not meaningful.


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## Statler (6 Dec 2011)

The BoA figures assume conversion back to punt nua etc. at the same rate as entry into the Euro as far as I can make out. Whereas, the Nomura figures seem to convert 1 for 1. 

Can anyone confirm this for the Nomura report?


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## chewchew (6 Dec 2011)

Brendan Burgess said:


> I don't suppose you have a link to ING's research?



Afraid not, sorry. I've had a search around google news but couldn't come up with anything else.


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## Chris (6 Dec 2011)

Brendan Burgess said:


> Frank, that seems to be what they are saying. They say that it is the most undervalued of all the eurozone currencies.
> 
> I find it hard to believe, but it is important because we all just assumed that it was risk-free moving your money to German euros.



It all comes down to what they are using as their premisses for the conclusion they come to. The way I see there would be two factors to consider. Firstly, if the "punt nua" was introduced, what wold the market be willing to pay for it. Secondly, and in my opinion more importantly, what would politicians do to interfere in that valuation to drive it down. 
On the second part I would expect and bet on politicians telling us that we need to devalue to stimulate the economy, even when the exact opposite would happen.


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## rgfuller (12 Dec 2011)

*Irish pound could rise in case of euro break-up, say analysts*

Interesting article in the independent today: 

Though I can't find the original research from BoA.


By Brendan Keenan

Monday December 12 2011


A new Irish pound would probably rise against other currencies, not fall, with Ireland appearing to be the most competitive of the major euro economies, research by Bank of America analysts has found.
Their study reveals a huge difference between Ireland and the other pressurised economies of Italy, Portugal and Spain -- which would need devaluations of 11pc, 14pc and 20pc respectively against the dollar to restore lost competitiveness.

But the Irish economy could take a 9pc rise in the value of the euro against the dollar before its competitive position was "fair value", currency analysts Richard Cochinos and David Grad say.

Only three of the countries studied would have under-valued national currencies -- Germany, the Netherlands and Ireland -- and the notional Irish punt would be the cheapest. A French franc would be 7pc over-valued.

The analysis is based on exchange rates last month. Currency values move around daily on the market but, with member states locked together in the euro, the relative position between them does not change.
The research challenges the widespread view that a new Irish pound would suffer a huge fall in value if the euro broke up. This has led thousands of people to move money into sterling and other foreign currency accounts.

They face possible exchange rate losses if the euro crisis abates, but might also find in the medium term that a new Irish pound could rise above the old one's value of €1.27.

*Shock*
The Bank of America analysts say a break-up of the euro is not their expected outcome. If it did happen, "there would be large shocks to all the currencies involved, with violent swings in the euro. No model can fully account for this."

Economists say the main implication of a disorderly break-up of the euro would not be the effect in currencies, but the collapse of a large part of the European banking system and another great depression.

The significance of the research is that it suggests Ireland is well capable of prospering within the euro, and does not need a devaluation, unlike the countries with over-valued real exchange rates. The question of debt levels is separate, although it is included in the analysis.

This went beyond the question of what a euro will buy in each country, to take in factors like productivity, real yields on bonds, the balance of payments with the rest of the world, budget deficits and prices for exports and imports.
- Brendan Keenan


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## shnaek (12 Dec 2011)

rgfuller said:


> Though I can't find the original research from BoA.



Yes indeed. I expect many articles like this to pop up in the coming months so that people will stop moving their money abroad. 
The Irish punt may well rise against a currency or two, but it most certainly won't rise against the currencies that count.


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