DP12965 The term structure of redenomination risk

Author(s):	Christian Bayer, Chi Kim, Alexander Kriwoluzky
Publication Date:	May 2018
Keyword(s):	ECB Interventions, Eurocrisis, redenomination risk, yield curve
JEL(s):	E44, F31, F33, F45, G12, G14
Programme Areas:	International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=12965

This paper assesses redenomination risk in the euro area. We first estimate daily default-risk-free yield curves for French, German, and Italian bonds that can be redenominated and for bonds that cannot. Then, we extract the compensation for redenomination risk from the yield spreads between these two types of bonds. Redenomination risk primarily shows up at the short end of yield curves. At the height of the euro crisis, spreads between first-year yields were close to 7% for Italy and up to -2% for Germany. The ECB's interventions designed to reduce breakup risk successfully did so for Italy, but increased it for France and Germany.