English Articles > Written January 15, 1999
The euro wasn't built in one day :
How the eurotransition went in Paris.

1 euro=6.55957 French francs
The euro's born, and everything went right. The transition had been so much rehearsed during several week ends that it's almost no surprise. "All the process went even faster than we had planned, said Michel Haski, chief executive of Dresdner RCM Global Investors in Paris. Book keepers were able to close 98 exercise few ours in advance and to proceed to the conversion ahead of the schedule." So, for most institutions, the currency transition was implemented by Saturday January 2nd, instead of Sunday. All portfolios are now valued in euros and all securities are quoted in euros. For these two aspects, the franc, and all other Euroland currencies, have disappeared. But it doesn't mean it's over. The euro won't be build in one day. From several points of view, the pilgrimage has only began.

Redenomination struggle
One of the hassles French institutions have to deal with is the redenomination. The problem is simple: all bonds' nominal values were denominated in the currency they had been issued, for instance in French francs. With the new currency, all these nominal values need to be "redenominated" in euros, in order to ease coupon payments and redemption.

To show the way, governments have redenominated their debts first, as of January 1st. Most Euroland governments have redenominated all their bonds in 0.01 euro pieces. But for unexplainable reasons, the French government has chosen to redenominate all its bonds in 1 euro pieces, which means that for every line or French bonds investors hold, the new nominal amount of securities won't match the old nominal amount converted in euros. The difference, which is less than 1 euro, will be repaid by the government. "This is an enormous amount of work for us, says Hervé Douard, consultant with the asset-liability advisory firm Fixage. There are enormous software problems in many institutions we work for. There are many subtleties softwares haven't seen and we need to retreat them one by one." Among the bugs seen, Hervé Douard mentions a case where software took Deutsche marks for euros.

More to come
Another problem comes from the fact that not all government bonds have the same redenomination pattern. For instance Zero coupon bonds are mostly redenominated in 0.25 euro pieces, but few others are redenominated in 0.5 or 1 euro pieces.

And this is only the beginning. "There's also a debate to choose if we treat the tiny repayments as redemption or revenues, pursues Hervé Douard. And to decide if it changes the yield to maturity of the line or not." The worst is that many more redenominations are still to come, and probably less orderly. All other public and private issuers will have to redenominate their debt in the coming years but there is no long term schedule. They will come by small groups every Saturday, like French railroads network, French coal and Société Générale on February 13; Credit Agricole and others on March 6, and so on.

Euroland is not France
Since January 4th, the eleven Euroland participating countries have the same currency and one central bank. The currency risk disappearance makes their bonds perfectly comparable and fungible. The whole Euroland bond market is an estimated 6 trillion euros (compared with a US bond market of 11 trillion dollars). And France is only 24% of that pool. But it doesn't mean French institutions are rushing to reallocate 76% of their bond portfolios in other Euroland countries.

"Some institutions just won't do that because they're not allowed to invest in foreign securities", says Jean-Claude Leconte, president of Image & Finance consulting firm. Many retirement institutions are still governed by specific regulations that simply require them to invest in French securities listed in the Paris' Bourse. But even for the others, jumping in the euro pool is not an easy choice. For insurance companies, for instance, the accounting issue is huge. Selling their existing French bonds would realise their potential gains. And, technically, they won't be available to offset virtual losses that could occur if they bought Euro bonds at this level.

Gilles Pouzin