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How to Value a Partial Euro Zone Breakup

A string of disappointing European government bond auctions have stirred buzz about more dramatic solutions to the region's debt crisis such as a partial breakup of the euro zone.

Yuji Sakai | Digital Vision | Getty Images

But what would that mean for currency valuations?

Spain, Italy, Portugal and France are overvalued against the dollar , while Germany, the Netherlands and Ireland are the most undervalued, said Richard Cochinos and David Grad, strategists at Bank of America Merrill Lynch.

They estimate the fair values for the old currencies against the dollar as follows: Deutschemark, 1.38; French franc, 5.26; Italian lira, 1607; Dutch guilder, 1.55; Spanish peseta, 171, and Irish pound, 1.85.

Then there is the question of what happens to the euro's value if different countries exit. A departure by a troubled country like Greece would presumably lift the euro and one by a financially stronger country would cause it to fall.

But the strategists found some surprises as well in their analysis. If either Italy or even France left the euro zone, the euro would likely gain about 2% against the dollar, according to the strategists' calculations. If Spain left, that would lift the euro by about 3%. But if Germany were to bail out, the euro would lose about 2%.

To be clear, the Cochinos and Grad don't expect a breakup of the euro zone but said it can't hurt to have a plan. And hey, at least now you know what those old souvenir Deutschemarks should be worth!

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