European Union: The Colour Of Money: Currency Considerations Of A Eurozone Withdrawal

Last Updated: 13 February 2012

Policymakers, the European Central Bank ("ECB") and the International Monetary Fund ("IMF") continue to search for a way to alleviate the Eurozone's debt crisis. Meanwhile there is a growing threat that one or more of the Eurozone Member States ("EMSs") will be forced to leave the single currency. As countries such as Greece, Italy, Portugal and Spain remain locked in debt restructuring negotiations, the words of British economist John Maynard Keynes hold greater resonance than ever: "if I owe you a pound, I have a problem; but if I owe you a million, the problem is yours".

If an EMS does exercise the "nuclear option" of leaving the Euro the potential financial consequences for the global economy are colossal, and companies worldwide are now carefully considering the problems that they may face. Following on from our first paper on the implications of the withdrawal of an EMS from the Eurozone, this paper examines the historical impact of currency redenomination and the key issues for businesses to consider.

Lessons from history

Although over 60 countries have left currency unions since World War II – many such as Pakistan and the Republic of Ireland after obtaining political sovereignty, others such as Germany and France to join the Euro – should an EMS leave the Eurozone there is uncertainty as to the impact on its new currency. Whilst it was not a member of a monetary union equivalent to the Eurozone, valuable lessons can be learnt, and potential implications for the exit from the Eurozone identified, from Argentina's decision to re-float the Argentine Peso ("Peso") in 2002.

When the current version of the Peso replaced the Austral in 1992, after a period of hyperinflation, Argentina's Central Bank ("ACB") pegged it to the US Dollar at a 1:1 exchange rate and in addition the country's financial reserves held one US Dollar for every Peso in circulation. As with the countries in the Eurozone – who have their interest rate set by the ECB – in effect, Argentina had relinquished its sovereignty over monetary policy as its interest rates were ultimately set by the U.S. Federal Reserve. Pegging the Peso to the US Dollar initially helped to stabilise inflation and attract investors, but imports rose (harming domestic producers), GDP fell and unemployment rose. As the country struggled to service its very high international debts the IMF pressed the government to adopt an austerity budget, and civil unrest spread. At the very end of 2001 the country defaulted on US Dollar 132bn of its public debt, and the following month the government allowed the ACB to set a new "official" exchange rate of 1.4 Pesos to one US Dollar. It also redenominated US Dollar bank accounts into Pesos at this new rate. Soon afterwards the Peso was allowed to float freely, and by June 2002 it had depreciated to a rate of 3:1 against the US Dollar.

Many contracts with foreign investors were denominated in US Dollars, as one would expect. With the flotation of the currency, this meant the cost of contractual payments rose significantly. However, the political risk element for such foreign investors arose in the actions of the Argentine Government at the time passing legislation to "pesify" contractual payment terms denominated in US Dollars. The Government also stepped in to emasculate provisions (often called stabilisation clauses) by which tariffs in the gas and electricity markets were linked to the US price index. Devaluation led to a surge in inflation and the insolvency of a number of companies, though over the succeeding years GDP rose at an impressive rate.

In the absence of any European legislation that provides a mechanism for withdrawal from the Eurozone, there is wide-spread uncertainty as to how an exiting EMS would reinstate its pre-Euro currency. Notwithstanding the practical considerations associated with any reversion, such as the time and finances required for the secure printing of a new currency (an issue that Argentina was not forced to deal with), learning from the Argentine experience it is widely anticipated that in the short term the exiting EMS would experience significant economic problems. If investment were to immediately flow out of the economy, the exiting EMS would be faced with a dilemma: either to impose exchange control restrictions which could inhibit its competitiveness or to free-float the new currency and risk a strong surge in inflation. In any event it is clear that alongside widespread unrest, a redenomination and the probable depreciation of the new currency would expose those companies around the globe with business interests in the exiting EMS to financial risks.

Future of the Eurozone: Considerations for companies

In light of the potential ramifications, companies would be wise to consider the potential impact to their business in the event that an EMS withdraws from the Eurozone. Although policymakers are confident that the Eurozone's seventeen members will remain in the single currency, it remains far from certain as to whether the necessary antidote to Europe's debt crisis will be agreed upon before exercising the "nuclear option" is considered the only solution.

In the event that an EMS does withdraw from the Eurozone, there are a number of issues which may arise such as:


I have a contract with a company incorporated in an exiting EMS which provides that payments are to be made in Euros. Will redenomination of the exiting EMS's currency have any impact?


Potentially, as redenomination of contractual payments would be subject to the internationally recognised "lex monetae" principle. This principle provides that where a monetary obligation is stipulated in a particular currency, an implied choice of law of that currency's country determines the currency to be applied. As the Euro is not the currency of one particular country, it is not certain how the courts would apply this principle, for example, when having to decide on a contract denominated in Euros between a buyer and seller incorporated in different EMSs. When identifying which country's law applies a court will take into account a number of issues, including the contract's expressly agreed governing law, the parties' intention when entering into the contract, the place of performance and the place of payment. The court will also take into consideration the Rome Convention which provides that when the place of performance is in doubt it is not necessarily the place of payment. Mandatory rules (i.e. those which apply regardless of the parties' choice of law) will also be key. Should the court decide that the law of the contract is that of the exiting EMS, or that the law of the exiting EMS applies regardless of the parties' choice or intention, then the contractual payment is likely to be redenominated into the new currency of the exiting EMS.

In this event there are a number of potential consequences that a business should consider. As redenomination is anticipated to result in a subsequent depreciation of the exiting EMS's new currency, it is likely that the real value of the contractual payments would be significantly reduced. Alternatively, if contractual payments were to remain in Euros the value of the contracts could increase for contracting parties in an exiting EMS whose bank deposits would have been redenominated. Accordingly, there is a real risk that such companies, in particular those that rely heavily on domestic revenues, would be unable to satisfy their contractual obligations. Furthermore, even where a company is able to pay there is the possibility that such payments could be delayed or blocked as a result of exchange control mechanisms in the exiting EMS. Irrespective of the potential fluctuations in the value of contracts, where a new currency renders performance more expensive under English law it will not provide grounds for the contract to be frustrated. Additionally, companies should also consider the mandatory rules that an exiting member state may implement which could, for example, impact on the governing law of contracts


I've got a Letter of Credit ("LC") from a bank incorporated in an exiting EMS. Will I still be able to rely on this LC and will the monies be redenominated from Euros into the exiting EMS's new currency?


Ultimately this will depend on the specific terms of the LC and any legislation passed by the exiting EMS. In the absence of any terms/law which provide that the issuing bank may revoke the LC in the event that (for example) the EMS where the bank is incorporated withdraws from the Eurozone, it is likely that the bank will not be able to do so. In any event, it is rare to find an LC that is revocable. However, as bank deposits and guarantees are likely to be redenominated in the new currency, the value of the LC may depreciate in line with the likely devaluation to the new currency. This would mean that a company that holds a LC with a bank in an exiting EMS may find that its value is now significantly less than when it was first issued.

Additionally, as history shows us redenomination is likely to result in significant financial disturbances and a withdrawal of capital from banks incorporated in the exiting EMS, there is a risk that banks would be unable to meet payment obligations and be forced to write off loans to their insolvent borrowers. In the event that banks struggle to obtain external financing, either through government or capital markets, their credit ratings would be impacted or in the worst case they may face insolvency themselves. Already we are witnessing banks in vulnerable EMSs facing insolvency proceedings and companies should be aware that the global economic debt crisis has meant that banks can no longer be considered "bullet-proof". By way of protecting their interests, companies should carefully examine the terms of their LCs and look to obtain confirmation of the issuing bank's obligations from a confirming bank in their jurisdiction. Further, companies should also consider alternative measures to obtain security, for example with banks in less vulnerable EMSs or in non-Euro member states and/or by guarantees from a company in the corporate group based outside of the exiting EMS (although, as everyone is coming to appreciate in this crisis, banks and even countries presently thought to be "safe" can quickly become a credit risk).


I have obtained a judgment from an English Court. Can I enforce it against the assets of a company incorporated in an exiting EMS?


Under the Brussels Regulation (EC Regulation 44/2001) (the "Regulation") there is a reciprocal enforcement of judgments amongst European Union ("EU") member states. However, as there is no enshrined mechanism for withdrawal from the Eurozone it is not certain whether the Regulation would apply to an exiting EMS. As new legislation to restrict the flow of monies out of its economy would be implemented, it is possible that judgments denominated in Euros would not be enforced in Euros by a court in the exiting EMS. It is possible that the new legislation may provide that the courts in the exiting EMS can only enforce payments in their new currency and accordingly there is a risk that the judgment's value would be significantly diminished.


I am currently negotiating a deal in Euros. Should I insert any particular wording into the contract or would you advise an alternative currency for payment obligations?


Whether or not to amend a contract, or face the possibility of a change of currency, will be a risk and reward balancing exercise for each counterparty. There will be many contracts under which one of the parties would be very happy if their obligations were redenominated into a depreciating currency. However, where a party wished to ensure the currency always remained the Euro, clear wording should be inserted to the effect that "Euro" means the currency of the Eurozone from time to time and not the domestic currency of the EMS where the company is incorporated.

Alternatively, to avoid any potential disputes regarding the currency of contractual payments, companies may consider denominating the contract in a currency other than Euro, such as US Dollar or UK Sterling. Although, again, this would be a risk assessment for each contract counterparty, as no guarantees can be given in this crisis about the strength of any currency.


I am looking to enter into business with a company incorporated in a peripheral Eurozone economy. What steps should I take to protect my interests?


When looking to enter into a new business venture or renewing contracts in an existing relationship with any company based in the Eurozone or elsewhere they will no doubt take heed of the current political and economic climate. Should an EMS withdraw from the Eurozone, or in the worst case the Eurozone disbands, there are likely to be significant ramifications for businesses worldwide. Companies should carefully review the terms of any agreements and consult with their lawyers to contingency plan. Some issues which they may wish to consider are:

  1. Whether the governing law is the law of a vulnerable economy
  2. Whether it is appropriate to insert terms to the effect that each party waives any right under their applicable domestic law to satisfy payment in any currency not stipulated under the contract
  3. Whether the parties should agree to consult and re-negotiate the currency provisions in the contract should an EMS withdraw from the Eurozone As part of their contingency planning, when obtaining security companies should also consider checking the geographical location of the account of the issuer and consider whether potential

As part of their contingency planning, companies when obtaining security should also consider checking the geographical location of the account of the issuer and consider whether potential redenomination legislation and exchange control mechanisms could impact on any future payment obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.