UBS: Euro exits could lead to civil war
Wednesday September 07 2011 | 07:22 AM

Any country leaving the euro currency would be hit with massive losses and a collapse of international trade and could even face civil war, Swiss bank UBS has warned. 

In a document examining the potential impact of a euro area break-up, the bank argues that a weak country leaving the euro would likely see a sovereign default and a collapse of its banking system.

The state's ability to devalue its new currency would indeed offer "little prospect" of support as the EU could impose tariffs ensuring the new currency would be unable to fully depreciate, the report says. 

Losses stemming from exiting the euro would see each citizen incurring a cost of between €9,500 and €11,500 during the first year - amounting to a massive loss of between 40 and 50 per cent of GDP in the first year alone. 

The figure would likely reduce to between €3,000 and €4,000 per citizen in subsequent years, says the report, published on Tuesday.

It blames the losses on a series of factors that would follow a currency changeover. Any nation leaving the euro would almost certainly have to default on its sovereign debt, given that its entire debt would be denominated in euros, over which it has no powers of taxation.

The only way of earning euros would be through international trade, which is likely to be significantly disrupted. Default on the euro denominated national debt is "almost certain", the report claims.

A new issue of sovereign debt in a new currency would generate around a 700 base point risk premium charge which could paralyse the banking system, it says. As a result, it assumes that its international trade would be halved. 

A new currency issuance would also likely see its value fall by around 60 per cent against the euro.

While monetary break-ups are very rare, the report notes that historical parallels are "unappealing". It says: "Past instances of monetary union break-ups have tended to produce one of two results."

"Either there was a more authoritarian government response to contain or repress the social disorder (a scenario that tended to require a change from democratic to authoritarian or military government), or alternatively, the social disorder worked with existing fault lines in society to divide the country, spilling over into civil war."