Sunday, 15 February 2015

On physical mechanisms for a Greek withdrawal from EMU

There's been a great deal written about the financial and social consequences of the Hellenic Republic withdrawing from European Monetary Union, a scenario which appears to have become substantially more likely with the election of a SYRIZA/AN.H coalition government which is innately suspicious of the Euro, coupled with the intransigence of the Troika. I am not going to go into the economic argument, as there are numerous articles by people with a far greater knowledge of the subject freely available.

I haven't, however, despite looking, been able to find any description of the physical mechanism for a Greek withdrawal.

As far as I can see it, there are three options for Greece, both of which have historical precedents in Europe.

The first option will be the least likely. With Greece moving closer to the Russian Federation, the European Union may find that its refusal to deal with Greece in a fair manner leaves the accountants in Athens seeking a bail-out from Moscow. It is not inconceivable, but not likely, that this will mean Greece adopting the ruble. This is unlikely for two reasons - firstly, economic sanctions on Moscow means that the ruble is currently about as stable as Britney Spears. Secondly, an adoption of the ruble means that Greece is in broadly the same unpleasant position as it is at the moment: decisions on the Greek economy will still not be made in, or tailored to, Greece, with the only change being that they will be made in Ilinka Ulitsa to suit Moscow, rather than at Ruckertstrasse to suit Frankfurt. And, whilst there has been talk of Moscow offering currency unions to Belarus and Kazakhstan, these economies are closely integrated with that of Russia, which they both also border.

Consequently, I strongly believe that the notion of Greece adopting the ruble is extremely unlikely. This leaves Yanis Varoufakis with only two remaining options: dollarisation and a new currency. Dollarisation, as used in East Timor, Panama, Iraq, Zimbabwe and Kosovo, amongst others, is the unilateral adoption of a strong currency. For an advanced economy like Greece, and for similar reasons why adopting the ruble is unpalatable, it carries enormous risks. 

The only real option, therefore, is a new Greek currency. 

There are two decent parallels here. Firstly, the emergence of new currencies following the inability of the Austrohungarian krone to continue.

This currency was essentially the forerunner to the euro, covering several current eurozone states such as Slovenia, Austria, Slovakia and Italy. When the new Yugoslavia walked away from the krone - for the not entirely unreasonable reason that the empire had collapsed and was suffering hyperinflation because Budapest had made the mistake of printing heaps of banknotes to finance the First World War - they instituted border controls to stop money entering or leaving the country, and stamped all of the krone notes in the country with an overprint to identify the old krone currency as a brand-new Yugoslav currency.

There is a slight difference between Yugoslavia in 1919 and Greece in 2015: Yugoslavia left the krone because it wanted a stronger currency, whereas Greece seeks a weaker currency. Furthermore, the krone ended up collapsing entirely and caused all sorts of hassle, which left everyone very cross indeed.

A better, and more modern, example, is the dissolution of the Czechoslovak koruna (the similarity of the krone and koruna names is incidental). 

After Czechoslovakia dissolved itself, quite by accident, into two separate states - Czechia and Slovakia - they intended to maintain a currency union. And so they did.

For a month.

Both countries stamped Czechoslovak banknotes with distinctive national designs, and in a surprise announcement, told Czechs and Slovaks that they had four days to exchange the old currency for the new, after which Czechoslovak notes would be worthless. A maximum of 4.000 Czechoslovak koruna (around £90 at the time) could be exchanged by each citizen.

Again, exchange controls were implemented to stop Slovaks (the weaker economy) transferring their money into the stronger economy of Czechia, and bank withdrawals banned.

The Czech/Slovak split will likely provide the model for Greek withdrawal from the euro, and it is almost certain that New Drachma banknotes have already been printed and are being stored in a basement in Panepistimou Street.

In the event of a decision to withdraw from the euro, the most likely mechanism will be that the announcement will be made on a Friday morning, and exchange controls implemented immediately. Bank accounts and transfers will be frozen, and a bank holiday declared for the next Monday, and possibly Tuesday. This gives four or five full days for the Hellenic Central Bank to complete the transfer.

As soon as the decision is announced and bank accounts frozen, money held in bank accounts will be redenominated from euro into New Drachma at whatever exchange rate the Bank of Greece and ECB agree on. Physical coins and banknotes held in Greece will be made invalid and exchanged for Drachmae.

There will be little need to stamp existing euro in Greece as they already all have national symbols. Coins, of course, are immediately identifiable by the national symbol on the obverse. It is, though, little-known that although all euro banknotes carry a common design, they also have an identifier of the country of issue: the first letter of the serial number. Greek banknotes have Y as their identifier. 

To protect the economy and deposits from bank runs, it is likely that all banks will be immediately nationalised.

It is not completely unlikely that the New Drachma will be a currency based, at least initially, entirely on banknotes to save on the cost of minting coins. This option is already in use in the Republic of Belarus. This also has the added advantage that when the ND collapses in value - which is, after all, the entire point of it - against the euro, it will be much easier to redenominate banknotes. 

Greece's economy is one based almost entirely internally. This will make it easier to carry out the transition, whilst also bringing in hard currency through tourism, its only major "export". It is quite likely that one will not be able to purchase or sell New Drachmae officially outside the country, which is the case with the Serbian dinar. I learned that one to my cost when I was unable to exchange my dinars for Hungarian forints in Budapest after leaving Serbia a couple of years ago. This means that Greece will be able to build reasonably substantial foreign currency reserves in short order. 

The transition from the euro to a New Drachmae will not be easy - but if accomplished quickly and in great secrecy, it ought not to be overly complex.

De La Rue, the currency printers, estimate that from order to delivery, the institution of a new currency can be accomplished in a matter of months. The Greek government took office on January 26th. I note, without comment, that all Greek banks are scheduled to close on the afternoon of April 9th and reopen on April 14th for an Orthodox religious holiday. That gives four full days of bank closures. This would be a convenient time to announce a changeover without risking a bank run.

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