While next to impossible, now may be a good time to ignore the constant barrage of meaningless noise and flashing red headlines, which not only are contradictory but prove that Europe is literally making it all up as it goes along. Today is a great case in point of a tangential detour which does nothing to change the reality that Germany no longer wants Greece in the Eurozone …
16 February 2012 5:40 AM
When the Greeks default, the first thing you do is book that holiday
This is my column from today's Irish Daily Mail --
You know it’s coming. Greece is going to default on its debt and pull out of the single currency. On some Friday at 5 pm -- and it is going to have to be on a Friday evening, so the banks and every account in them can be frozen until Monday morning – the Athens government will announce that they are pulling their country out of the single currency and re-establishing the drachma.
But what happens next, what happens when the Greeks wake up on the Monday to find they no longer have euros but only drachmas?
Listen to the eurozone true believers and you will imagine that all that waits for Greece outside the euro is what used to wait for anyone outside the one, holy, catholic and apostolic church: an eternity at best in limbo, at worst in hell. They forecast a run on the banks, a flight of capital, border controls to stop the terrified people of Greece trying to shift cash out of the country, and a crippling legacy of international business contracts and debts which must be repaid – if ever they can be repaid – in euros. Then eternity in international limbo.
Better listen to someone in less of a euro-religious frenzy. Try Raoul Ruparel, the euro expert at the Open Europe think tank. He says Greece pulling out of the euro would be ‘a messy affair.’ Then he can list a load of mess, but in the end, ‘the new currency would devalue quickly making the economy competitive again and providing the prospect of an export-led economic recovery – an impossible hope within the eurozone.’
That’s more like it. Though I’m not going to say the true believers are entirely wrong. Yes, there will be a run on the banks once the Greeks suspect that the Friday 5 pm announcement is really going to come.
Or rather, a run on what’s left in the banks. People with money in Greece figured out many months ago that their country is bound to drop out of the euro. They have already shifted their multi-millions out of Greek banks. Much of the money went into Switzerland.
Indeed, the flood of Greek euros gushing into Zurich banks is suspected to be one of the reasons the Swiss National Bank last year had to take fierce steps to stop the rocketing value of the Swiss franc.
This is good news. It means that much of the big money of Greece is already abroad and safe from devaluation – and therefore ready to come back into Greece for investment once things under the new drachma calm down
And investment not least in the Greek tourist industry. Because the first result of the Greeks dropping out of the euro and into a new, cheaper drachma is that Greece will offer the cheapest holidays in Europe.
At the moment, any eurozone tourist arriving at the Athens airport is arriving with euros, a.k.a. the German currency, in his pocket. He will have to pay for hotels and meals in German currency.
Imagine instead he could take this German currency to the exchange bureau at Athens airport and buy some new cheap drachmas with it: holiday lotto win.
My advice is that the moment you hear Greece has dropped out of the euro, book your ticket to a Greek island. The Greek tourist industry will boom once the country is out of the euro.
Moreover, to return to that knock the euro true believers are warning Greek banks will take if the country goes back to the drachma, the banks are about to be made more or less bust anyway by the so-called controlled default which the eurozone is still trying to negotiate with investors.
The truth is that Greek banks, what’s left of them, are to be flattened this month or next month when the eurozone bosses finally negotiate a ‘controlled default’ of privately-held Greek sovereign debt.
The reason is that Greek banks hold vast billions of this debt. The eurozone countries are supposed to find another €23bn in these debt negotiations just to recapitalise the Greek banks after the hit of a ‘private sector involvement’ bond swap. Otherwise known as an agreed 70 percent default.
When Greece leaves the euro, or just before, it will whack the remaining 30 percent off its debt. Then it will be starting its new life with its new currency without debt. Already Greece has its finances enough in order that its revenues now pretty nearly cover its outgoings, except for the cost of financing the sovereign debt. Walk away from that debt, and, wee-hee! Free at last.
But how will the country then finance itself? By doing what it should have done in the first place. It can go straight to the International Monetary Fund in Washington and deal with their experts in debt write-offs and devaluation. Getting involved with the other two troika members, the EU and the ECB, as senior to the IMF introduced politics and the goals of the ‘European project’ into Greek’s mess.
Of course, there are practical problems to solve. First, there is the question of printing new currency. Swedish economist Gabriel Stein covered this in a 2009 report for Lombard Street Research: ‘There will probably have to be a period in which euros and the new currency circulate together, but the experience of the switch to euro notes and coins’ – and we all remember that – ‘has shown that this parallel circulation period can be fairly limited – probably no more than a fortnight.’
Euro banknotes have a code which shows which eurozone member has issued them. The code letter for Greece is Y. We can assume that during that change-over weekend a fixed exchange rate will be announced between the euro and the new drachma. So the Greek government can use ‘its’ Y-currency as drachmas until new notes are printed.
Then there is the matter of contracts and other liabilities denominated in euros. As Mr Stein points out: ‘In the run-up to EMU, this was dealt with by legislating that all liabilities denominated in the legacy currencies’ – meaning, for example, the punt – ‘would as of a certain date be deemed to be denominated in euros at a pre-announced exchange rate.’ All that would have to happen is that this process be reversed.
As for bank deposits, the Greek government could pass a law saying that all deposits by Greeks in local banks will be deemed to be in the new currency. Foreigners holding accounts could be given a choice whether to keep their deposits in euros or switch them to the new currency.
As for why foreigner would want to let his account be switched to new drachmas – which of course would be devalued against the euro, that would be the point of dropping out of the single currency – he probably wouldn’t. Which is why most foreigners with Greek bank accounts must have already shifted out their money.
Mr Stein suggests one way to deal with the danger of a run on deposits collapsing the banks: offer depositors an interest rate so high in the short term that it could compensate for the devaluation risk (Mr Ruparel suggests the banks would be nationalised, and he may be right). Or the banks could attract deposits from elsewhere, borrowing on the inter-bank market.
And after that it gets technical, but just remember that devaluation is a decision made throughout financial history by many different countries.
It’s not fatal. It’s just business. The risks can be contained, and are survivable.
But if Greece stays in the euro the pain will be more years long and deep and real economic health cannot return.
For Greece, it is well worth the suffering to be free again, free to rebuild its businesses and employment, free to attract every foreign investor to its newly cheap commercial property and newly low cost labour -- and every one of us to its beaches and tavernas.
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