Thursday 19 October 2017

Ireland has most to gain from leaving the euro, says US bank

Nick Webb

Nick Webb

Ireland and Italy have the most to gain from leaving the euro, according to new research from Bank of America Merrill Lynch.

Using cost-benefit analysis and game theory, BofA Merrill Lynch foreign exchange strategists David Woo and Athanasios Vamvakidis believe investors "may be underpricing the voluntary exit of one or more countries" from the eurozone.

"Our analysis produces a few surprising results that even readers who may disagree with our conclusion are likely to find interesting," according to a report produced by the BofA Merrill Lynch duo last week.

The analysts indicated that Ireland and Italy would enjoy a higher chance of achieving an orderly exit than others and would stand to benefit from improvements in competitiveness, economic growth and balance sheets.

Suggestions that Germany could leave the euro with the greatest ease are probably unfounded as it would face weaker growth, possibly more expensive borrowing costs and a major hit to its balance sheets.

Austria, Finland and Belgium are also seen as the countries with the least incentive to head for the exit. Of the more troubled nations, Spain is seen as having the least to gain from leaving the euro.

The Bank of America Merrill Lynch research ranks 11 of the 17 euro nations on certain criteria, such as how orderly their exit from the single currency would be and the potential affect on economic growth, interest rates and national balance sheets.

Ireland and Italy received an average ranking of 3.5, while Greece was at 5.3 and Germany had the highest score at 8.5. The lower the number, the more there would be to gain from leaving.

The analysts suggest that while Germany could "bribe" Italy to remain in the euro to avoid the carnage from a break-up of the bloc, it may not have enough firepower to do so.

"If our inference turns out to be correct, this could have negative implications for markets in the months ahead," the analysts wrote.

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