A Greek Exit

This is beginning to look possible.  Moreover, it would be beneficial for the remainder of the euro zone, the remainder of the European Union, and for Greece.  The Greeks have an entirely different set of social mores, economic goals, purpose of money, and purpose of government from, say, northern Europe, and the shotgun wedding that tried to meld the two sets was doomed from the start.

A Greek departure, aside from the benefits to all, is a theoretically simple thing to achieve.  There is no mechanism in the EU governance documents for handling—or preventing—a nation’s departure, and there is no mechanism in the euro zone governance documents for handling—or preventing—a nation’s departure, either from the euro zone while remaining in the EU, or from both the euro zone and the EU.  There is only for Greece, as an ironically named shoemaker’s ad has it, to just do it.

No, the departure would be an engineering task.  But like all engineering tasks, the devil is in the details, and a departure could be smooth and quickly done, or it could be a clumsy affair, stumbling on at great cost for years.

The Wall Street Journal has one set of possibilities for effecting a Greek withdrawal from the euro zone, but there are additional details that need consideration, also.

How does Greece leave the euro?
In one scenario, a Greek authority would have to agree on a date with the rest of the euro zone for its departure and for the introduction of a new currency (let’s call it the new drachma). It would say that from that date, all public salaries, contracts and pensions would be paid in drachma. Bank deposits would also be redenominated. The authority would likely decide an initial conversion rate on domestic contracts from euros to new drachma—say one-to-one—then it would likely let the exchange rate of the new drachma be decided by the currency market.

This is fine for internal matters, but Greece—its government entities, its private businesses, and lots of individual citizens—have international dealings, not least with Europe.  An initial exchange rate (and a pegging schedule, or timing for letting the “new drachma” float freely) with the EU, with Turkey, with China, with the US, et al., all would have to be worked out: the “Greek authority” would be in no position to impose its domestic exchange rate externally.  This negotiation will be no easy matter, either, especially in light of an expected free fall, but to unknown depths, in market value of the “new drachma.”

Among the things to be handled, for instance: euro-denominated Greek bonds, sovereign and corporate, held by the European Central Bank, by member nation central banks, by private enterprises external to Greece.   Also in the mix would be cross-border private enterprise contracts for delivery of goods and services to be paid for in euros.

Nor, after all, can we dismiss domestic private enterprise questions: the “Greek authority” can announce an exchange rate to its heart’s content; many of these domestic businesses still will feel sufficiently put upon—or will consider that they no longer have anything to lose, anyway—that they will sue.

A major new litigation industry will be spawned.

Moreover, the euro, as a “sound currency,” likely will still circulate widely in Greece; although any influx in euros would necessarily be dependent on actual commerce—just as the US$ circulates with some ease in Mexico and the Philippines (or did when I last was there some years ago), for instance.  The Greek government’s problem here is to manage the domestic exchange rate in this grey market, rather than to attempt to ban that market altogether.  The best way to eliminate that grey market is to better manage the Greek economy—which is to say, to get out of the way of the economy—so that it can recover and the “new drachma” can take its place as a usable currency.

What would the ECB do?
The ECB probably would no longer be able to lend to banks against Greek government debt as collateral.  With no euros available, this would be the moment when the government would have to distribute another currency as a means of exchange.

Timing is everything, but this is simply an exercise in clock watching—there’s no rocket science here.

What would happen to the debt [emphasis added]?
The debt would largely fall into two categories: money that the government owes to its bondholders and official creditors, and money that the banking system owes to the ECB.  As both of these types of debts are under international law, they would have to be restructured by negotiation. Domestic debt would likely be redenominated in new drachmas.

Here is the other nub of the problem.  The Greek bailout “negotiations” are exactly about how to deal with this debt.  After having left the euro zone, and especially after having left the EU, should it come to that, it would be far easier for the Greeks simply to repudiate that debt and walk away.  This is what Alexis Tsipras, head of the SYRIZA party (now Greece’s second most powerful party), wants to do.  However, such an outright repudiation would cause damage to perceptions of Greek reliability that would take decades—a rollover of generations—to redress.

No doubt, the transition period surrounding a departure will get ugly.  The Institute of International Finance thinks it would cost…somebody…€1 trillion ($1.29 trillion) for the Greeks to quit the euro zone.  Moreover, until things settle out, Greek businesses and banks will find it very difficult to obtain funds for cash flow—the sort of short term borrowing that is a part of the normal operation of businesses.  It’s in this period that the grey market of euros for “new drachmas” and euros for Greek goods and services—entirely within Greece, mind you—will get started.

The rest of the euro zone and of the EU have their own fears of a Greek departure: contagion and a run on the banks of many of the other nations—not stopping in southern Europe, but heavily damaging France, Netherlands, Belgium, even Germany, all of whom (and others) have loaded up on Greek sovereign debt in an effort to prop them up.  This fear of contagion is overblown.  Yes, there would be a brief run on the banking institutions of the rest of the PIIGS—mostly Spain, Italy, and Portugal—and of France, Netherlands, and Belgium because investors are cautious sheep.  Yes, actual losses, and sharp ones, will occur.

But the best way to get  a sheep caught in a fence out of that fence is to try to push it deeper in.  Walk now, and the storm will be harsh, but brief, and those other PIIGS, and the rest of Europe, will weather it.  Nor the euro zone nor the EU are at risk—although, as I’ve written elsewhere, a real fragmentation would benefit everyone.

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