Some time ago, I read an interesting article that outlined the fact that a Greek exit from the Euro would compound its problems in that it would have a new currency that would devalue markedly against the Euro, but would have all its debt still denominated in Euro. Obviously the situation would be resolved either by passing a law that redenominated all Greek debt into the new currency, or simply by defaulting on the payments of Euro debt. The end result for investors would be much the same.
The interesting thing to consider, though, is if Germany were to quit the Euro. The rule that applies to Greece would presumably apply to Germany too: a new currency would be introduced, but the nation’s debt would still be denominated in Euro. In this case, however, the new currency would presumably appreciate massively against the Euro, thus reducing Germany’s debt burden as measured in its new currency. This begs the question: would Germany redenominate all its Euro debt into its new currency? Certainly this is what investors expect as they push bund yields to record lows during the current “flight to quality”, but upon what basis can such a redenomination be expected?
The Germans may simply shrug.