How would Greece create a new currency?

Print pagePDF pageEmail page

From British Channel 4

With the possibility of Greece leaving the eurozone after elections on 17 June (2015), Channel 4 News looks at how the country could adopt a new drachma.

With elections in June that could lead to Greece leaving the euro, Channel 4 News looks at how the country would adopt a new drachma (Getty)

The good news for Greece is that currency union break-ups are not unprecedented. Past experience from several countries shows that while in the short term, life becomes harder, over the longer term, stability returns, along with economic growth and rising living standards.

Reuters reported on 18 May that the British firm De La Rue had drawn up contingency plans to begin printing drachmas if Greece left the euro.

Although state printers would have primary responsibility for replacing euros with drachmas, it is thought that they would need help from experienced companies like De La Rue, but the firm was not willing to comment when Channel 4 News called on Monday.

Speed

With or without De La Rue’s help, immediately after a euro exit, Greece could find itself short of drachmas – because it would need to make a decision extremely quickly. This would mean some financial transactions being carried out in unconventional ways, possibly using coupons and bartering.

After the introduction of the new drachma, it would rapidly depreciate against other currencies on the financial markets, by as much as 50 per cent, according to Capital Economics.

The advantage is that, in theory, this would boost demand for Greek exports because they would be cheaper, giving the economy a badly needed fillip. But the disadvantage is that imports would become much more expensive.

Debt could be redenominated in drachmas, potentially cutting what Greece owes at a stroke, but outraging creditors. People’s savings in Greek banks would be redenominated in the same way, causing their value to fall dramatically.

It is thought that 70bn euros have already been withdrawn from banks, and it is likely that Athens would have to close borders to stop people smuggling out euros.

Unrest

Greece would also have to prepare for social unrest, with the army deployed on the streets of a country with a history of military dictatorship.

With the knock-on effects possibly spreading to other vulnerable eurozone countries, such as Spain and Italy, there would be limits on how much international aid was available for Greece.

Capital Economics has been looking at how a break-up of the euro could be managed in its submission to the Wolfson economics prize. Its entry is one of five shortlisted by the judges, who will choose the winner in July.

The company envisages one country, Greece, leaving the euro and says preparations for a departure would have to be made in secret to ensure that people’s euros were not sent out of the country to safer havens, causing a banking collapse.

D-Day

Once a decision had been made, the European Commission, European Central Bank, International Monetary Fund and national central banks would have to be told. Shortly afterwards, there would be an announcement on a Friday saying that on Monday (D-Day), Greece would be returning to the drachma. Immediately afterwards, banks and financial markets would be closed, pending their reopening on Monday.

Capital Economics suggests that the new drachma is set at parity with the euro – that is one drachma for a euro – before the markets move in and force a devaulation.

It says that ideally, new notes and coins would be available immediately, but because of how long it takes to produce these, it is unlikely this task could be accomplished in less than a few weeks.

With elections in June that could lead to Greece leaving the euro, Channel 4 News looks at how the country would adopt a new drachma (Getty)

While waiting for the new currency, Capital Economics argues that alternatives to cash could be used for most payments.

It says most business-to-business transactions are already carried out electronically, along with the payment of wages, while “a good proportion” of cash transactions could be made by credit and debit cards, cheques, bank instructions or IOUs.

In 2012, with people using cash less frequently than they used to, it is no longer king. But where cash is still used – for paying cleaners and babysitters, for example – euros could continue to be used, along with IOUs. In other words, until drachma notes and coins were widely available, which could take up to six months, Greece could allow drachmas and euros to co-exist.

Bank run 

To ensure that people did not withdraw their euros from their accounts, causing a run on Greek banks, banking transactions would have to be stopped for a period. This could be combined with more stringent capital controls, with households and businesses forbidden from buying foreign assets, investing abroad or holding bank accounts outside Greece.

Capital Economics believes this would be unnecessary in Greece, but says the country would have to convince the markets that it had a plan to contain inflation and put the public finances on a sustainable footing or risk an excessive decline in its exchange rate.

Greece’s problem is that it is heavily in debt and leaving the euro would mean a substantial default.

For the original article and other related stories click on:
http://www.channel4.com/news/how-would-greece-create-a-new-currency-if-it-exits-the-euro

Leave a Reply

Your email address will not be published. Required fields are marked *