I construct a time-series measure of currency redenomination risk in French, Italian, and German government bonds based on different types of CDS contracts. Older contracts do not cover redenomination into a newly issued French, Italian, or German currency as a credit event while newer contracts do. The risk of France or Italy leaving the Eurozone has sizeable spill-over effects on other Eurozone sovereigns. Sovereign yields across the Eurozone fall with increases in Italian redenomination risk, but respond heterogeneously to French redenomination risk: German and Austrian yields fall, while Portuguese yields rise. The findings are consistent with the interpretation that an Italian exit from the Eurozone is expected to remain isolated, whereas a French exit is more likely to be followed by a further disintegration of the currency union.
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