As a legacy of the euro crisis, the reversibility of Eurozone membership has become a generally accepted risk, especially for euro government bonds. The European Central Bank bail-out commitment  (“Whatever it takes” and Outright Monetary Transactions, OMT) has capped the risk below systemic levels – for now. But euro government bonds do include a premium for redenomination risk, i.e. the risk of being redenominated into a new national currency. Redenomination premia happen to be important drivers of euro sovereign yields, influencing the steepness of the curve and contributing to the low yield level in core Eurozone countries.

Using the redenomination premia of 11 Eurozone countries, we introduce the “Allianz Euro Fragility Index” to capture the systemic tail risk of a Eurozone breakup. While it stands at 0.04, implying low overall risk currently, it is very likely that we will again experience phases of increased redenomination risk as its underlying causes, namely the perceived weakness of the euro architecture and political uncertainty, persist.

Looking at the implied exit probabilities for each Eurozone member, we find the probability of an Italian exit is currently around 6%. For France it is around 1% and for Germany around 2%.