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The Drachma’s eventual return

May 21, 2012

Trade unions’ negotiation power is at its strongest when factory capacity utilisation is high.Last Thursday, IG Metall obtained 4.3% rise in salaries for 800,000 workers of the steel industry in the Land of Baden Wurternberg . This follows a 6.3% rise for federal employees. This confirms Germany is definitely on its way to allow some inflation. The Bundesbank and after it, the ECB are, at last, giving up their priority of price stability targets. This is in line with talks this weekend at the G8, about austerity and growth in the Euro area. Of course, the main topic remains Greece and its staying or not in the Euro.

The EU officials deny any scenario involving the return of the Drachma…Meanwhile, when Mr Schauble, German Finance Minister, declares his wish to see Greece within the Eurozone and that the confidence crisis should be over within a year or two, I am concerned.  Does that mean they will let the situation rot over another two years, as they have so far? Or does it mean that with some action, it will be resolved within two years?

Can they afford buying time? Provided they had money to buy it with…

After the G8’s wishful declarations about the Eurozone and Greece, the press, who didn’t buy them, is rather articulate, this morning, about the possibility of the Helens returning to the Drachma. Let’s suppose it happens, it has to happen quick so that the man in the street doesn’t have time to withdraw all his money, avoiding a mega “bank run”. One way to keep the monies inside the country and the banks will be that “what is in an account remains in Euro”. The rest of your life will be in Drachma, Kostis.

As the Central Bank won’t have time to print Drachmas, all euro notes in circulation in Greece will have to be “marked”. The Drachma, whatever its value at that very moment…will be worth much less in the following minutes.  Salaries will be paid in Drachma and Greece will regain competitiveness. Tourism and exports (what did they export again?) will explode and there will be inflationary pressure, to say the least. The Euro can only strengthen…because it will be freed of this heavy weight.

the EU will have to be creative. It is time to rethink seriously about the issuance of European Brady bonds or Trichet bonds, as was discussed at length last year in June. And regulations as well as definitions of default have to be re-written, to avoid a run on credit derivatives contracts by those who have bought protection on Greece, and possibly other countries such as Spain, Ireland, Portugal and Italy.

A “Brady/Trichet solution” may have to be softened by the inclusion of the Drachma in the equation. The value of the debt will be reduced. Away from a “full Drachma Jacket”, bond principals could be denominated in Drachma while coupons could still be paid in Euro. Expensive but the only way to keep some confidence. If, before maturity (which will have to be dramatically lengthened), Greece returns to the Euro, principals could be paid back in strong currency then. It’s hard for current bondholders, but any other solution (issuance of zero to guarantee principal etc…) would probably cost much more to the European Union.

From → Markets view

  1. Very insightful. It is clear that for Greece, the return to the Drachma is the fastest and most effective wau out o f this mess. But the can the rest of Europe handle it emotionally? Can the pro-Euro politicians and technocrats accept the finality that their lofty and charitable aims to enrich southern Europe with the north’s money is a failure?

    • Nevin,
      The true failure was with Eurostat being unable to track economic reality while being unconditionally trusted for it by the EU members.

  2. Christian Lear permalink

    Choosing one or the other is not necessarily the answer. One could imagine an internal currency, the Drachma, and an international currency, the Euro, much like the USD is all of south America, accepted in all countries by mostly everyone. China also operates on a dual monetary system. It looks like this might be an option of choice.

    • It does make sense indeed, Christian. Greece would be a Euro’ized country then, where all prices are discussed in Euro.

  3. wasp permalink

    I saw drachma coming from 2010 .It was,and still is, a more sensible long term solution instead of kicking the can down the road.Yet the possibility of Greece adopting a sovereign currency is fading away.Why do you think this is happening and what can be a trigger event for this to happen from now on?

    • Dear Wasp (I think I know who you are=, you may have realised that this article is dated 2012. I apologise for not having updated my views since then but, as an employee of a Bank as from decembre 2012, I was not allowed to have a financial blog. Hence my flipping to short stories (in french). As to the comment itself, I truly think the Brady solution was the best solution. At that time. And why not today, after a proper default.

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