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Alternative Market Briefing

Preparing for the unthinkable: Dechert advises on risk planning in the event of a eurozone exit

Wednesday, March 21, 2012

Beverly Chandler, Opalesque London: A legal update from Dechert’s Financial Services Group, The Eurozone Crisis: Risk Planning for Asset Managers, aims to advise asset managers in the case of one of more of the EU states leaving the eurozone.

The firm estimates that in an extreme situation, the crisis could result in one or more of the following 'euro’ events:

  • a dramatic loss of confidence in the ability of the exiting state to maintain its financial creditability;
  • transfer of funds away from financial institutions in the exiting state by domestic as well as foreign depositors
  • fund transfers accelerate into a run on the banks;
  • imposition of exchange and capital controls by the exiting state to prevent an exodus of capital;
  • the exiting state leaves the eurozone (unilaterally or by some form of agreement) and redenominated its euros into a new domestic currency;
  • this is followed by significant inflation and devaluation of the redenominated currency against the euro;
  • affected banks and other institutions default by on their obligations, triggering creditors’ claims and leading in some to insolvency or nationalisation;
  • (conceivably) the imposition of border controls by the exiting state to prevent a temporary population shift out of the exiting state; and
  • considerable uncertainty as to the correct legal chara......................

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