Is There An Easy Way Out? Private Marketable Debt And Its Implications For A Euro Breakup: The Case Of France

What would be the short-term financial consequences of exiting the Euro? This article addresses this issue by focusing on some key strategic non-financial corporations and systemic banking Groups of French nationality. We show that special attention should be paid to the marketable debt under foreign law issued to finance domestic activities which is unlikely to be redenominated in a devalued domestic currency becoming suddenly much more difficult to service. What would be the magnitude of this effect ? Drawing on a new database on debt securities compiled at the firm level and taking into account the nationality of the ultimate issuer, this paper identifies strategic and systemic French companies that would end up, in case of a Euro exit, with unhedged mismatches on their respective consolidated balance sheets, thereby triggering large negative balance sheet effects. These very mismatches would prove to be in fact very similar to currency mismatches faced by many financial and non-financial corporations in emerging economies at the time of the Asian crisis in the late 1990s, with the difference that they would be related to the juridical nature of the contracts instead of the currency of issue. We find that a significant share of the French financial and non-financial private sector finances its domestic activities with Eurodenominated debts under foreign law, which would ultimately remain in Euro and be repaid with a devalued currency if France were to leave the Eurozone. Historical examples support the idea that this "redenomination channel" has been crucial in explaining the successes or failures of exits from monetary unions. The "redenomination issue" played an important role in the 2002 Argentine collapse. On the contrary, some specificities, unlikely to be found in the Eurozone, of the widely-praised exits from the Gold Standard in the 1930s and of the "Velvet Divorce" in 1993 Czechoslovakia explain why this very issue was defused. Hence, the problem of private debt and the difficulties of redenomination appear to be much more formidable than conventional wisdom has long held and this should be kept in mind by policy makers.