There was no plan for a eurozone break-up when the European Monetary Union was created. In fact, policymakers made an effort not to spell out any procedures for an exit from the eurozone as euro adoption was supposed to be “irrevocable”. But the genie is now out of the bottle.

Those who pretend a eurozone break-up is not a possibility are ignoring reality. Various forms of eurozone disintegration are possible, ranging from a very limited break-up (involving one or a few small countries), to a full-blown break-up (which would see the euro cease to exist). Most would agree that a Greek exit is a very real possibility. But break-up risk is not only a Greece-specific issue. The fact that Italian five-year credit default swap contracts imply a roughly 30 per cent probability of an Italian default, highlights the possibility of a full-blown break-up scenario.

The increasing risk of a break-up is already having an impact on investor behaviour. Since the Italian bond market came under pressure in mid-2011, foreign investors have been looking to reduce their eurozone exposure across the board: in the second half of 2011, we estimate that foreign investors sold €130bn worth of eurozone fixed-income instruments. This compares to foreign purchases of €320bn in the first half of 2011. This huge swing highlights the size of the shift in foreign investor sentiment.