How Greece could exit the Euro

Some months ago several MP's expressed their thoughts, by way of their blog's, on how Greece could revert back to the Drachma. The following is based on my comments on those blog's.

I still think Greece will have to exit the Euro, but it is impossible to predict when it will happen.

In forming my plan I have not forgotten that it is the Greek Government and State that is in dept, the people themselves are not necessarily so, though many are. Any plan must aim to maintain existing private and business wealth to avoid runs on banks and capital flight, though I think the latter has already happened.

My plan for Greece would be;

1) Introduce the new Drachma initially with parity to the Euro. Government bonds and the like would be converted to Drachma immediately.

Converting all bonds to Drachmas is to encourage the markets to consider their actions, if they force the Drachma down too much then they will take a bigger haircut.

In the short term Government borrowing requirements would be met with freshly printed Drachmas.

2) All existing private and business bank accounts etc, would remain Euro accounts. The only condition would be that these accounts would be able to take and give Drachmas at the current prevailing exchange rate, there would be no separate buy and sell rates and no commission.

This is to avoid a run on the banks and does not destroy existing private and business wealth. A business with a million Euro's in an account, in readiness to pay for materials and services recently supplied to them, will still need a million after D day.

Banks needing support on this aspect would be supplied with freshly printed Drachmas.

3) Banks would offer Drachma accounts, with the same provision as the Euro accounts on currency transactions.

4) All government employees and state benefits would be paid out in Drachmas. This reduces both the immediate and longer term cost of government. This might seem unfair, but would encourage employees to move to the private sector.

5) All financial legislation, such as income tax allowances etc, would be changed to Drachmas.

6) All new government contracts would be in Drachmas. Old ones would remain in Euros though renegotiation would be encouraged.

7) Both Drachma and Euros would be legal tender. Ultimately real Euro notes in circulation would dry up, if only through wear and tear.

8 ) All existing private and business loans and contracts would remain in Euros. This would encourage interested parties to renegotiate. On future loans and contracts businesses would be left to choose for themselves as appropriate.

This has happened in Iceland, people who had loans and dept's before the crisis still have to pay off the full amount of those dept's, even when the lending bank has vanished.

9) Businesses would be free to pay employees in Euros or Drachmas.

This plan would take a bit longer to improve Greece's competitiveness, compared to other more nuclear proposals I have seen, but it would be less destructive.

Some additional notes of clarification,

The existing Euro bank accounts, discussed under 2 above, would not necessarily dispense Euro cash notes when requested, they would more likely dispense Drachmas at the current exchange rate. Exceptions would be cash for foreign travel etc.

Over a period of time the existing Euro bank accounts would be closed, perhaps going through a withdrawal only phase, so balances could be transferred. The aim would be to significantly reduce the number of Euro accounts operated by the banks.

In Argentina, prior to the financial collapse, people could have US dollar denominated bank accounts. With the onset of the crisis people where allowed limited or no access to their money in those accounts, which further fuelled the situation. As the crisis progressed those accounts were effectively confiscated by converting the dollar amounts to pesos on a 1 to 1 basis, though by then the pesos value was much lower than the US dollar. I believe the banks and government are still being sued for the return of those monies. My plan seeks to avoid such situations.

Some people have suggested some unworkable ideas,

Converting bank accounts and loans, based on nationality, to Drachmas would be impractical. Any plan to introduce a new currency has to be openly published so that legislation and other measures can be put in place several months in advance. Indeed any suggestion that bank accounts would be converted to Drachmas on a 1 to 1 basis on D day would lead to a massive run on the banks.

Sorting out Euros notes in to two piles, that is Greek and none Greek Euros, across Europe would be impractical. It would create a reluctance both on the part of businesses and customers to use cash, imagine everyone inspecting their change at a supermarket till in say Germany. Greek Euros have to remain legal tender across Europe. As I said above they will physically wear out and would be withdrawn by existing procedures.

03/11/2012

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