Nomura "Goes There" With "The Legal Aspects Of A Eurozone Breakup"

Tyler Durden's picture

Below we present the note from Nomura which is making the rounds today following the WSJ article referencing it and which touches upon a topic discussed by Zero Hedge way back before even the second Greek bailout from July 21, namely that the statutory law governing the sovereign bond indenture (i.e., whether bonds are issued under Greek or English law) should have major implications for trading dynamics due to the defatul fallback currency in the case of a currency collapse. In a nutshell: "Bonds issued under local law, such as Greek law, would likely be converted from euros into a new local currency—a blow to any investors left holding the paper. "New" currencies, such as a new drachma, could rapidly fall in value by as much as 50%, according to most estimates. Foreign-law debt, on the other hand, would be more likely to remain in euros, assuming a smaller euro still existed at all, the bank said." That Nomura and the WSJ is only half a year late with this discussion is not surprising. What is surprising is that the discussion has appeared in the first place: needless to say this is another rhetorical escalation in the push to get Merkel on the "same page" as it being telegraphed all too loudly that investors are now actively gearing up for a Eurozone collapse. Then again Nomura bankers are people too and deserve to be well paid for being part of the detested 1%. How else will this happen unless they too join the onslaught by the global banking syndicate which now consists of Deutsche Bank, JP Morgan, Barclays, Credit Suisse, and virtually everyone else, expect for Goldman of course, which appears quite happy with the chips falling as they may. After all, it already has Europe by the political short hairs. Now it just needs to take charge financially too. If in the process a few not so good banks are converted into omelette, so be it.

Nomura with a topic that diligent ZH readers are already well aware of.

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.

Full executive Summary:

  • Escalating tensions in the Eurozone, around Greece as well as core Eurozone countries, mean that the risk of a break-up has sharply increased. The potential for a break-up raises the question about the future of current Euro obligations: Which Euro obligations would remain in Euros, and which would be redenominated into new national currencies.
  • Investors should consider three main parameters when evaluating „redenomination risk?: 1) legal jurisdiction under which a given obligation belongs; 2) whether a break-up can happen in a multilaterally agreed fashion; and 3) the type of Eurozone break-up which is being considered, including whether the Euro would cease to exist.
  • In a scenario of a limited Eurozone break-up, where the Euro remains in existence for core Eurozone countries, the risk of redenomination is likely to be substantially higher for local law obligations in peripheral countries than for foreign law obligations. From this perspective, local law obligations should trade at a discount to similar foreign law obligations.
  • In a scenario of a full-blown Eurozone break-up, evaluating the redenomination risk is more complex, as even foreign law obligations would have to be redenominated in some form. In this case, redenomination could happen either into new national currencies (in accordance with the so-called Lex Monetae principle), or into a new European Currency Unit (ECU-2). This additional complexity in the full-blown break-up scenario leaves it harder to judge the appropriate relative risk premia on local versus foreign law instruments.
  • The distinction between local and foreign law jurisdiction also becomes less important in situations involving insolvency. In those instances, the lower redenomination risk associated with foreign law obligations may be negated by higher haircuts. Hence, the legal jurisdiction therefore seems most relevant from a trading perspective in connection with high quality corporate credits which are highly resilient to insolvency.
  • Redenomination risk is not only a legal matter. Redenomination risk for German assets has a different economic meaning compared with redenomination risk for Greek assets.

Full note:


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Manthong's picture

Ground floor opportunity on a Drachma IPO.

trav7777's picture

such a move would blow the EUR skyhigh versus all the EU-exits.  Talk about immediate hyperinflation.  Let's recall that to even get into the EU, those nations had to swap future cashflows for lumpsums on accession even to qualify.

Urban Roman's picture

Need a triple-inverse leveraged drachma swap.

BandGap's picture

On top of a triple dog dare you. I often wondered what a slow fizz explosion would look like from up close.  Plug your ears.

Sudden Debt's picture

Tyler, a small question:

If a person has a loan of 100k in euro's and the country switches currencies, does that loan also switch in that currency or does it stay in euro's?
Because if one has 100k in euro's and the new currency drops 50% the income also drops so it would cause other massive bank defaults because of non payments right?

And if it changes to the new currency, it would be smart to take a loan in greece just before transfer the money out, wait after the devaluation and pay off the loan an pocket 50% in profits.

Ethics Gradient's picture

That would depend on whether:

a) the Euro still exists in any form

b) where the originator of the loan is based and whether that country still uses Euros

c) whether the location of the orginator has a new currency that is likely to appreciate or depreciate

d) whether the originator is still in business

e) whatever laws are passed in the originators country

In short. Anything could happen.

disabledvet's picture

That's why you swap your euros for gold immediately. We know gold will not collapse in value as everything else must. Thus that 100000 euro debt can be repaid in gold that has doubled or even tripled in value--subject to negotiation of course since the value of the property has collapsed as well.

msamour's picture

I have discussed this subject with many people, and this is what I would do following this hypothetical example. Situation: Canada has just been absorbed in the the North American Union, and the Canadian dollar no longer exist, therefore, all trades would be done in the new currency from that point on. I would take whatever Canadian money I could find that is being "Trashed", rushed to the bank, and pay my debt in Canadian dollars$.

It should be mentioned that my only debt is a student loan, that is somewhat substantial, and I have very few assets that can be seized. IF the banks, or the institution in charge of recovering student loans refuses to accept my payment, I would take them to court with the argument, that my loan was contracted in Canadian Dollars, and therefore becomes void when Canadian Dollars are no used as currency. I would attempt to argue in court that I did not sign any contract in the new currency, and there are no provisions in my contract that indicates that I must pay in any other currency than Canadian Dollars. Of course Bankers would be fuming, and would attempt everything to get me to pay in the new currency. I strongly believe, that I would not have to pay, and if they are still intent on collecting, they can seize the few little possessions I have. According to the contract I signed, I have to repay my debt in Canadian Dollars, if they are no longer used, and ceases to exist, it's no my problem.


Now times my situation by the many thousands of people that would take their case to court, and you can imagine the chaos that would ensue...

SilverRhino's picture

A contract euros is a contract in Euros.   Were any escape clauses written into it covering that possibility?  

Were debt contracts in Confederate Dollars, South Vietnamese Dong, Reichsmarks voided out?  Does force majeure cover a currency default? 

Those might be questions to put to a lawyer first.  And don't sign ANYTHING from your lender without really checking fineprint for shit like that.

Ethics Gradient's picture

Sure. Agreed. But don't forget that a contract is a legally enforceable agreement due to the law in place at that time. If a newly elected populist government of a state that has just rediscovered its sovereignty decides to pass some weird laws to redenominate contracts, the contracts will be redinominated.

Omen IV's picture

if you are in a box in any negotiation - dont negotiate - just change the rules of engagement - the game -in a contract it is all about definitions - as you know it depends on what the word "is" means at any point in time in other words -  or  buy the judge -  promise him a partnership in the law firm when he retires in 9 months - SOP - and get summary judgment on something ridiculous - this is america!

shortus cynicus's picture

I agree. There is one precedent in US when Gold was confiscated redeemed by FDR.

Some private contracts were denominated in gold but government forced to accept payment of that contracts with inflated FRNs.

All speculation reduces to one question: what suits the big government and their masters best.

Some countries may decide to flush their banks and all national debts down and start from scratch again. But the stronger ones (Germany?) may try to shield the banks and let them collect debt in new stronger currencies.

Germany is currently in a grip of credit driven real estate buying orgy. All are speculating on debt-reduction by EUR devaluation. I'm not so sure if this leveraged bet will end as borrowers are wishing.

Milestones's picture

Article 1 Section 8 (?) of the constitution (?) Ex Post Facto law would really complicate the issue.     Milestones

Long-John-Silver's picture

Simple answer.

If you are Politician or a Bureaucrat you make out big time.

If you are just a citizen you get screwed big time.

Ropingdown's picture

Only if you are still a politician or beaurocrat when the dust settles...

Silverballs's picture

They would never make it that easy for a peasant

GeneMarchbanks's picture

'In a scenario of a limited Eurozone break-up, where the Euro remains in existence for core Eurozone countries, the risk of redenomination is likely to be substantially higher for local law obligations in peripheral countries than for foreign law obligations. From this perspective, local law obligations should trade at a discount to similar foreign law obligations.'

Shrinkage. Significant shrinkage.

Ghordius's picture

And who will be so courageous and daring and thoughtful to lead any nation out of the EZ against the will of the majority?

And face the direct consequences, including the speculation pressure?

Our Politicians? Really?

To use ZH's lingo: "sheeple" don't like "daring, thoughtful" and love the old routines, the older, the better...

This Break up Dream is, at the moment, not common in the EZ, while wildly popular in The Two Cities.

Eireann go Brach's picture

We should start taking odds on who will be the first banker to be taken out either by bullet or rope?

Long-John-Silver's picture

Each fiat currency note will produce 12.44 BTU. The cremation process requires 800,000 BTU's of heat. Your fiat pyre will require 643,087 fiat currency notes.

bank guy in Brussels's picture

Your remark about the guillotine, points to a grim truth about merciful death, much more merciful than many condemned prisoners get today, 220-odd years after the guillotine was invented.

The guillotine was humane, though bloody to the observers. The firing squad with multiple riflemen, or a bullet to the head, is also humane, though once again somewhat bloody. The violence is not masked to the eye or mind, but bullets or beheading provide the most merciful death for a person killed by the government.

We Europeans are opposed to the death penalty, and that now includes Russia.

But it is very horrifying that many countries that still use the death penalty, largely use quite horrid and slow means, such as strangling at the end of a rope. - Sometimes with a long drop the person's neck is broken and he or she becomes unconscious, but death still comes by strangulation, taking 15 minutes or even much longer. Many strangle in slow agony. The USA even hanged two people in the 1990s in two of its states, one in Delaware, and one in Washington state near Microsoft and Bill Gates. - High tech and slow tortured death, the combination that seems to fit America as a symbol.

The American and other inventions for killing people, like the electric chair, have all gone terribly wrong at points, tormenting people to death slowly. And lethal injection has proved to be that way too. It is tormentingly cruel when it is a method of execution and not voluntary suicide of a terminally ill person in pain. People strapped to a table for half an hour while their killers poke needles into their arms.

The person in the US recently who had a choice between lethal injection and the firing squad, chose the firing squad. What most people would choose for a kinder death.

It was one of the virtues of the French Revolution of 1789, that the humane, nearly instant 'aristocratic' death was the death penalty whenever it was applied. And the great movement began to abolish torture in the world, a movement now in reverse because of the USA.

One of the ways that England and America stayed backward after 1789, was by keeping the slow death by hanging for its victims. England used to behead aristocrats, but of course they are rarely put to death in recent centuries.

Whereas the European model, after 1789 and before our abolitionist trend started in the 1800s, was to give all condemned prisoners the humane aristocrat's death, the Anglo-American model was to continue giving all condemned prisoners the slow death of the rope, which continues today in much of the world, even in advanced countries like Japan. Appalling.

It is horrifying to many of us here in Europe, the US one of the world's leaders in executions, along with China and Iran, when actually the US got along quite well for a decade, 1967-77, without any judicial executions at all. Ronald Reagan sent the last man to the gas chamber in 1967, and that Jimmy Carter, to his eternal disgrace, allowed Gilmore to go before the firing squad in the US state of Utah, to start the US government execution machine again.

In retrospect, when Jimmy Carter and America's judges allowed the death penalty again to start in 1977, that was the symbol that the USA was not going forward into progress, but into reverse, and would become what it is today, a country of murder and torture with a gulag of 2.3 million prisoners, 25 % of all the prisoners in the entire world.

We Europeans need to do more to object to the death penalty, and to all physical penalties to impose pain on people's bodies. Great European Muslim theologian Tariq Ramadan is advocating this for all Muslim countries in particular.

But beyond that, we should try to see that any country that does have the death penalty, uses the humane methods of bullets or beheading. The firing squad has the virtue of making it easier to capture violent criminals. Criminals will shoot to avoid being hanged or suffer other kinds of slow death, but they might make a milder decision to be shot later instead of now.

It's a sad world.


Hulk's picture

I say we round up all these corrupt political and financial fraudsters, must be at least a million of these parasites worldwide, ship them to the Nevada test site, and have one last above ground test. Let the bones lay where they fall, forever and ever, for all future fraudsters to gaze on and ponder...

Ropingdown's picture

Actually, the biggest problem with hanging, as they well learned at Alcatraz, was that the person's head often pops off.  Fact.  Which is also what is likely to happen as the head of the Euro goes one way (Germany et al) and the soft heavy body goes down.  Wouldn't be a pretty sight in either case.

FinHits's picture

I very much support the full break up with redefining Euro=ECU-2. Problem solved for this ponzi.

DutchR's picture

Paging Keyser Soze

Piranhanoia's picture

Incredible. Denial cubed, recubed. dimensionalized into the future.  The rubes at the top actually believe they will be allowed to breathe.  Greed is devotional. Stupidity, universal.

  What is the proper treatment for an officer that knowingly leads their men to harm?  Their men stop them. Quick, simple, permanent.  How many shit eating flies were executed by grunts in Nam?   I know, I know,  not enough.

catch edge ghost's picture

How about a law that soverign debt will trade at face value always and forever? For lenders, those assets could replace the antiquated 'Deposits' of yesteryear.

C'mon.. it'll still look like Capitalism. I won't tell anyone you did.


PulauHantu29's picture

$220 oil is Nomura's prediction.