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2011-11-20
Academics and analysts starting to take situation seriously
Eurozone break-up risk has risen notably over the past few months, as European policy makers have failed to put in place a credible backstop for the larger Eurozone bond markets. Given this increased risk, investors should pay close attention to the ‘redenomination risk’ of various assets. There are important legal dimensions to this risk, including legal jurisdiction of the obligation in question. Risk premia on Eurozone assets are likely to be increasingly determined by this ‘redenomination risk’. In a full-blown break-up scenario, the redenomination risk may depend crucially on whether the process is multilaterally agreed and on whether a new European Currency Unit (ECU-2) is introduced to settle existing EUR contracts.
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