Examining Sovereign Bonds Nominated in Euro and US-Dollar During the Euro-Crisis: Appreciation or Depreciation of the New Local Currencies Introduced Subsequent to Euro-Breakup?

Abstract

This paper analyzes by using a simple theoretical model and thereafter testing empirically the differences between Euro- and US-Dollar nominated sovereign bonds of euro-area countries during the euro-crisis and concludes that the probability of collapse of the Euro(-currency) has a significant impact on these differences. Moreover, the empirical analysis indicates that the new local currency that would be introduced in the case of a euro-collapse would maybe lead to a depreciation for weak countries like Italy, while it would lead for strong economies like Austria, Belgium, Finland and Germany to an appreciation. Further, this analysis is one of few showing evidence that the financial market takes into consideration the collapse of the Euro(-currency).