Is Drachma reintroduction imminent?

An article the Financial Post in February 2015 ( original article here ) suggested that the scenario for Greece leaving the Euro and returning to the Drachma would be as follows:

  1. Greek banks would clandestinely get word the country is abandoning the eurozone
  2. The newly pressed drachmas would arrive at various locations of the Greek central bank
  3. After three or four days of closures to convert the euros, Greek banks would reopen for business.

“It would happen, boom, like that,” according to Mr. Alex Jurshevski, who worked to restructure New Zealand’s debt in the 1990s and consulted with Iceland during its 2010 crisis.

Capital flight is the most pressing threat to Greece, and it’s already taking place. The closure of the banks this week with only tiny withdrawals allowed looks like a last-ditch attempt to stop everyday savers withdrawing their money.  Paul Donovan, a global economist at UBS AG, said in an interview: “People just pull their money out of the banks and you get a collapse in the banking system and that then spreads to different components of the monetary union.”

If Greece switches currency, any euros left in Greek bank accounts would be converted to drachmas – which would cost account holders dearly, as analysts estimate the drachma would depreciate by 50% to 60% in a matter of days.

However with the results of the referendum not due for several days, there is little else the Greek government can do for the time being. Much also depends on the European Central Bank – and whether it believes it can still allow funds to flow, to prevent banks in Greece from collapsing.

How to Leave the Euro

There simply is no mechanism to leave the euro currently. Why?

It was never envisaged by the bright-eyed politicians who created the impetus for the currency, which debuted in 1999.

“The treaties indeed confirm what we have been saying here: the treaty doesn’t foresee an exit from the eurozone without exiting the EU,” said a European Commission spokeswoman this week.

The treaties she is referring to are the Maastricht treaty from 1992, which led to the creation of the euro, and its successor, the Lisbon treaty in 2007.

So under its current obligations, for Greece to exit the euro, it would have to leave the EU. This option was only added in Article 50 of the Lisbon treaty.

Goodbye Euro, goodbye EU.

Leaving is straightforward; it involves a member state notifying the European Council – that is, the heads of state of the EU – that it wants to go. Greece would then be free to reintroduce the Drachma, it’s previous national currency.

The European Council should  then agree the terms of the exit via a qualified majority.

Would leaving the EU cause Greece’s crisis to get worse?

The key part of Article 50 involves “setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union”.

Should Greece leave the EU?

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the Debt Crisis

Causes

The Greek economy was one of the fastest growing in the eurozone from 2000 to 2007; during that period, it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. Since 1993 the ratio of debt to GDP has remained above 100%

Initially currency devaluation helped finance the borrowing. After the introduction of the euro in Jan 2001, Greece was initially able to borrow due to the lower interest rates government bonds could command. The late-2000s financial crisis that began in 2007 had a particularly large effect on Greece. Two of the country’s largest industries are tourism and shipping, and both were badly affected by the downturn with revenues falling 15% in 2009.

In 2009, the government of George Papandreou revised its deficit from an estimated 6% (8% if a special tax for building irregularities were not to be applied) to 12.7%. In May 2010, the Greek government deficit was estimated to be 13.6% which is one of the highest in the world relative to GDP. Greek government debt was estimated at €216 billion in January 2010. Accumulated government debt was forecast, according to some estimates, to hit 120% of GDP in 2010

Downgrading of debt

On 27 April 2010, the Greek debt rating was decreased to the upper levels of ‘junk’ status by Standard & Poor’s amidst hints of default by the Greek governmentYields on Greek government two-year bonds rose to 15.3% following the downgrading.

On 3 May 2010, the European Central Bank (ECB) suspended its minimum threshold for Greek debt “until further notice”,] meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee Greek banks’ access to cheap central bank funding, and analysts said it should also help increase Greek bonds’ attractiveness to investors. Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier.[36] As of 22 September 2011, Greek 10-year bonds were trading at an effective yield of 23.6%, more than double the amount of the year before.

Austerity and loan agreement

On 5 March 2010, the Greek parliament passed the Economy Protection Bill, expected to save €4.8 billion through a number of measures including public sector wage reductions. On 23 April 2010, the Greek government requested that the EU/International Monetary Fund (IMF) bailout package be activated. The IMF had said it was “prepared to move expeditiously on this request”. Greece needed money before 19 May, or it would face a debt roll over of $11.3bn.

The European Commission, the IMF and ECB set up a tripartite committee (the Troika) to prepare an appropriate programme of economic policies underlying a massive loan

On 2 May 2010, a loan agreement was reached between Greece, the other eurozone countries, and the International Monetary Fund. The deal consisted of an immediate €45 billion in loans to be provided in 2010, with more funds available later. A total of €110 billion has been agreed. The interest for the eurozone loans is 5%, considered to be a rather high level for any bailout loan.

Danger of default

Without a bailout agreement, there was a possibility that Greece would prefer to default on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. Analysts gave a wide range of default probabilities, estimating a 25% to 90% chance of a default or restructuring.

A default would most likely have taken the form of a restructuring where Greece would pay creditors, which include the up to €110 billion 2010 Greece bailout participants i.e. Eurozone governments and IMF, only a portion of what they were owed, perhaps 50 or 25 percent

Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an “orderly default” on Greece’s public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce a national currency, such as its historical drachma, at a debased rate (essentially, coining money). Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.

At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy. For example, the U.S. Federal Reserve expanded its balance sheet by over $1.3 trillion USD since the global financial crisis began, essentially printing new money and injecting it into the system by purchasing outstanding debt.