# 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.
> 
> ...



*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.


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## 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).


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## Kev (5 Dec 2010)

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


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## bluemac (5 Dec 2010)

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


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## 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...


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## spreadsheet (5 Dec 2010)

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


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## 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.


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## 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 ??


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## PaddyBloggit (5 Dec 2010)

*Ireland 'likely' to leave Euro*

[broken link removed]


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## 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?


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## 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.


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## CreNaCille (6 Dec 2010)

*Future of the euro*

Economist article on The future of the euro.


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## 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?


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## 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.?


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## 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...


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## 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.


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## 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?


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## 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?


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## 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


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## 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.


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## Lightning (11 Dec 2010)

Ethan 1 - Well, as Reuters said:



> The move is seen as a bid to attract UK customers, by offering them the same level of deposit protection as other British banks, the paper said.



The UK Post Office has lost deposits because the deposits are Irish state guaranteed rather than FSA protected, it would seem that BOI think they can attract greater deposits with a FSA guarantee. Either that or BOI is going to sell their UK operation.



Ethan 1 said:


> 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.



As The Economist said, it is likely that a new D Mark with soar after revaluation.


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## Jim2007 (18 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.



If it ever came the point where the Germans were going to a Neu D-Mark, do you really think they would happily convert all the external billions on deposit with them??? Not a chance, if they did the D-Mark would be like monopoly money!  If it really came to it they would do like everyone else and make a destination between residential and not residential accounts...

And before dashing off to put all your money in German banks, take a very close look at the state of German banking:
- Forced sale of the Postbank
- Indirect bail out of the Landesbanken
- Indirect exposure of German banks and Pension funds to the PIGS
- Trial of Josef Ackermann, current CEO of Deustche Bank
- Deustche Bank's reliance on it's investment banking and the desperate need to balance it with some retail banking....

People need to realise that foreign does not equal safety, it just means a different set of risk and in many cases higher risks because their ability to track and manage them is reduced.....

There is no single safe option and that means back to basics: clear financial objectives, a real understanding of the risks you are taking on and the use of diversification to manage those risks.

Good luck with that,

Jim


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## farmerette (20 Dec 2010)

Jim2007 said:


> If it ever came the point where the Germans were going to a Neu D-Mark, do you really think they would happily convert all the external billions on deposit with them??? Not a chance, if they did the D-Mark would be like monopoly money! If it really came to it they would do like everyone else and make a destination between residential and not residential accounts...
> 
> And before dashing off to put all your money in German banks, take a very close look at the state of German banking:
> - Forced sale of the Postbank
> ...


 

hi jim 

silly question but if one were to put all thier savings in rabbobank , them being a dutch bank , do you think they might cut loose thier savers in this country and not cover all deposits


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## Jim2007 (20 Dec 2010)

farmerette said:


> hi jim
> 
> silly question but if one were to put all thier savings in rabbobank , them being a dutch bank , do you think they might cut loose thier savers in this country and not cover all deposits



Well let me start by saying that I don't believe for a minute that the Euro will break up, in fact I expect the opposite to occur - the 16 members will be forced to adapt a much more integrated economic policy and if the pain continues a little longer the Germans will have to accept the idea of E-Bonds becoming a reality.  Simply because there is no realistic alternative.

So given that, I would expect that any break up or departure from the Euro with be very much a nuclear option and in such circumstance it would be everyone for themselves so to speak.  I can't see any benefit for a country, regardless of which on it is, to convert external deposits to it's new currency - it would just be asking for trouble in terms of inflation etc.  Consequently it would not surprise me to see external deposits be coming completely worthless!!!

Good luck with that,

Jim.


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## Lightning (20 Dec 2010)

farmerette said:


> silly question but if one were to put all thier savings in rabbobank , them being a dutch bank , do you think they might cut loose thier savers in this country and not cover all deposits



Very very unlikely.


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## Jim2007 (21 Dec 2010)

CiaranT said:


> Very very unlikely.



In a break up situation, what would be the advantage to them????  

And given the structure of the bank in the Netherlands, I don't see any reason for those local little banks being too concerned about what happens in Ireland at that point!

Jim.


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## Lightning (21 Dec 2010)

Jim2007 said:


> In a break up situation, what would be the advantage to them????



Rabo will have to follow the law of Ireland in a break up situation. They will have convert Irish domiciled EUR balances into An Punt Nua.


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## joe sod (24 Dec 2010)

what about rabo investments, surely the money is invested in stocks so even if it was converterted or the euro devalues, you are still invested in the stocks that you were invested in before which are still worth the same no matter what currency they are denominated in


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## Jim2007 (27 Dec 2010)

joe sod said:


> what about rabo investments, surely the money is invested in stocks so even if it was converterted or the euro devalues, you are still invested in the stocks that you were invested in before which are still worth the same no matter what currency they are denominated in



Well I expect that you would probably come out better than if you were simply holding the cash.  However you need to remember that the valuation of the stocks would also be impacted by how they are expected to perform in the new economic environment, so I would expect that the quality of the stocks held would also play an important factor in the equation.

Jim.


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## rikt (15 Nov 2011)

All this turmoil and chaos just seems to be leading everyone to "beg" for a european monetary government soon enough. If we weren't "squeezed" enough no one would want to join.

I might be completely wrong anyway as no one knows what will happen.


I also have some deposits and am very, very confused about what to do, leaving out all the conspiracy theories.

The safest thing right now might be to actually have a job, no matter what happens, assuming your company is alive&kicking, as this will provide money in whatever form it will have if the Euro breaks up.

Might want to stock up on canned food (no cooking required) and water, just in case the worst comes to happen. Sure hope not, but no harm to have some food around...you can eat it later and laugh at how paranoid you were at the time...trust me it's better to laugh about it later on than regret you didn't get anything.


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## roker (16 Nov 2011)

If you look at your €50 notes in your pocket, you will see that most of them are German beginning with a "X" in the serial number, they cannot just write these off!


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## dannyh (25 Nov 2011)

What would be the likely impact of doing nothing, leaving your deposits in a EUR denominated account in an Irish Bank if the Euro were to collapse? Would their purchasing power within Ireland remain unaffected?


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## Swyper (25 Nov 2011)

dannyh said:


> What would be the likely impact of doing nothing, leaving your deposits in a EUR denominated account in an Irish Bank if the Euro were to collapse? Would their purchasing power within Ireland remain unaffected?



No. Devaluation would be very quickly following by inflation.


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## Igcuimhne81 (25 Nov 2011)

The way I see it is, in order for the euro to survive (certainly seems to be the political will) then a purging of bad debts will have to occur. But how can this occur without a collapse of the banking system?

Well, the only apparent option to me is mass consilidation of banks throught out the eurozone. What I mean by this and what I think actually happening now this minute, is that each eurozone central bank is analysising the balance sheets of all the banks under their regulatory authority. They are determining 'good banks' from 'bad banks'.

What will occur is that the 'good banks' will take on as much of the 'bad banks' as is possible (overnight mergers) without jepordising the stability of the 'good banks'. The 'bad banks' will disappear, or more specifically, the bad debt of the bad banks will be foisted on the balance sheets of the prevailing governments. This will in turn risk defaults on the sovereign countries - At this point there will be a write down of debt by sovereign sates. The euro will collapse in value but only until such an extent that 'good banks' can now avail of cheap credit from the ECB. The 'good banks' will then lend the sovereign states the new, cheap euro, to keep the euro alive. Depositors will by and large be saved, but the value of their savings will diminsh. In turn, there will be political agreements for Treaty change. The de-valued euro, will limp along, as each sovereign state batters its electorate to believe that the only option is further integration - As Merkel stated, this crisis will last ten years.

BTW, it is already being reported in Spain

See bloomberg, "Spains Rajoy Seeks proposals for Bad Bank"


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## elcato (25 Nov 2011)

> No. Devaluation would be very quickly following by inflation.


Assuming the new Irish punt would devalue a lot more than other currencies in the break up. We could see a strong punt also so inflation would depend on where we are importing from.


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## rikt (25 Nov 2011)

Igcuimhne81 said:


> The way I see it is, in order for the euro to survive (certainly seems to be the political will) then a purging of bad debts will have to occur. But how can this occur without a collapse of the banking system?
> 
> Well, the only apparent option to me is mass consilidation of banks throught out the eurozone. What I mean by this and what I think actually happening now this minute, is that each eurozone central bank is analysising the balance sheets of all the banks under their regulatory authority. They are determining 'good banks' from 'bad banks'.
> 
> ...



Looking at it that way I wonder if I should change my deposits into Australian or Canadian dolars...even with the exchange risk...or just buy a house with the money I have and that's that.


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