Feature

Clueless about the euro’s end

Very few people on either side of the Atlantic seem to grasp the potentially catastrophic consequences for banks if the euro dissolves.

Simon Johnson
Bloomberg.com

Very few people on either side of the Atlantic seem to grasp the potentially catastrophic consequences for banks if the euro dissolves, said Simon Johnson. It all boils down to a basic uncertainty: “If you have a contract that requires you to be paid in euros and the euro no longer exists, what you will receive is unclear.” Let’s say you lent 1 million euros to a German bank. Then the euro dissolves, and you are offered payment in deutsche marks. But what would the exchange rate be? What would happen if you lent to a German bank’s London branch, or to a subsidiary in, say, the Cayman Islands? The legal and financial complexity would be mind-boggling. “Litigation could drag on for years.” And that’s just the straightforward contracts. “No one really knows” what the implications would be for the dizzying world of derivatives, but crippling losses for major U.S. banks seem likely. After all, if a bank like JPMorgan can lose $3 billion “in a relatively calm quarter through incompetence and neglect,” how much might it lose “when markets really turn nasty”?

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