How would a Greek transition out of the euro go?

by on June 21, 2011 at 12:15 am in Economics | Permalink

Forget about the macroeconomics for now, I am thinking about the sheer mechanics of it.

If Greece announced it was leaving the euro, it might declare a bank holiday.  For some number of days, no one can pull their euros out of the bank (otherwise all euros leave the Greek banking system).  The government would have to put a money stamping technology in place fairly rapidly.  Once the banks are reopened, withdrawn money gets a stamp and it is now a “Greek euro” or “drachma euro,” trading at a lower value of course.  Is there an indelible, irreversible money stamping technology and how long would it take to distribute it  to every Greek bank?  How about ripping off one corner of the bill?  That wouldn’t take long.  Would corrupt bank tellers, handing out notes but refusing to rip them, undercut such a plan?

There would be a relative windfall for those who held their wealth in the form of currency rather than bank accounts.  It is impractical to “round up” these cash balances and stamp them.

Alternatively, there are already “Greek euro notes” with the stamp on them of a Greek letter.  The Greek government could simply announce that such notes are now “drachmas.”  Would the market believe them and would the ECB have to make a counter-announcement, promising they are no longer full legal tender at par?  Par acceptance of these notes in Italy would mean massive arbitrage and also would impose further deflation on Greece.  I don’t know how many of the euros circulating in Greece are in fact stamped this way.  If most of them are, the problem of how to get out of the euro would be easier to solve.  The bank holiday could be quite short because there is already a “new currency” with a physical existence in place.  (But what would happen to a German citizen, in Germany, who held a lot of such notes after a vacation in Greece?  Would the German government make that person whole, while limiting arbitrage from Greek citizens?  Perhaps that could work, but of course Greeks would try to trade their notes to Germans.  Note that non-Greek merchants would have to scrutinize accepted notes fairly closely for a while; eventually the Greek government would sub in a currency with a more distinct appearance.)

At first prices would be posted in terms of (old) euros, then in terms of both currencies (as they do in Hungary), and sooner or later in the new currency only.  That shouldn’t be a big problem.

It’s the money stamping that is tough, or whether “Greek euro notes” are a satisfactory stand-in for the current currency of the geographical territory of Greece.  Can anyone speak to this?

Here is some research on the previous dissolutions of currency unions.

1 OneEyedMan June 21, 2011 at 12:36 am

Why change the physical currency? Why not make the Neo-Drachma an electronic only currency with a new fixed exchange rate to Euros. Shut down the banking system, convert the accounts at an unfavorable exchange rate, and if people withdraw the Euros, they get fewer of them than they used to. Then there is no reason for a run if the exchange rate is at right proper price. They could start with a severe value cut and see if it appreciates.

2 Elliot Rosewater June 21, 2011 at 1:20 am

Could they legally change the denomination at Greek banks?

How could they get away with substituting people’s Euros for Dracros?

3 Elliot Rosewater June 21, 2011 at 1:23 am

For example, say I had 1 kg of gold in a Greek bank, and the government decided I now had 1,000,000 Dracros.

They would, essentially, be doing the same thing by switching Euros for their own new currency.

It seems to me there would be some law against it. On the other hand, they are a sovereign country so I guess they can do what they please.

4 Firionel June 21, 2011 at 1:26 am

I think it is fairly certain that there is no imaginable way of separating several kinds of Euro-Notes. Even in the unlikely event of the (say) German government trying to go along with such a scheme, any citizen of the Union (not simply Germany) could demand restitution in the court system. And they would win. Easily.

At this point it would take massive changes to the constitution of a dozen European countries to limit convertibility of Euro-Notes. And this would quite possibly include stamped ones, unless you can convince the proper authorities that stamping them is basically the same as destroying them and recycling the paper. (That at least may be possible, depending on the mechannics of the whole thing.)

However one should ebar in mind that neither the central European governments nor the ECB will be much inclined to cooperate with a Greek government leaving the Euro…

5 TD June 21, 2011 at 1:35 am

Here’s one way to do it (although not completely accurate)

1. Euro coins have have a national side indicating which country issued them (which is not necessarily where they were minted).
2. For Euro notes, The first character of the serial number is a letter which uniquely identifies the country that issues the note. The remaining 11 characters are numbers which, when calculated their digital root, give a checksum also particular to that country. Because of the arithmetic of the check-sum, consecutively-issued banknotes are not numbered sequentially, but rather, “consecutive” banknotes are 9 digits apart.

For Greece, the letter is Y and the checksum is 1.

https://secure.wikimedia.org/wikipedia/en/wiki/Euro_banknotes

The problem is people outside Greece also hold Greek Euro’s (though given the size of Greek economy the amount is probably quite small).

Probably, the least painful option is to keep the people whole on Euro i.e. convert Euro’s into equivalent no. of drachma’s and use bank issued iou’s in the interim. If people know their bank balances won’t be wiped out, there won’t be a currency run. People can turn in their Y-Euro’s to their banks and get the drachma’s whenever they are available.

6 David Wright June 21, 2011 at 2:40 am

With regard to serial numbers, I just checked a pile of Euro notes I have left over from a vacation in Greece last year. The country codes are U (France), V (Spain), and X (Germany). So it would appear that the notes are fairly well mixed, or at least were a year ago.

7 TD June 21, 2011 at 2:55 am

Well … it also shows that people outside Greece don’t hold much Y-Euro’s. Germany, France and Spain being 3 of the 4 largest Euro-economies, the chance of you holding their euro’s is higher. (Assuming you got all these Euro’s in Greece, these are probably also the countries whose banks have highest exposures to Greek debt.)

8 Mogden June 21, 2011 at 1:53 am

Isn’t it the entire point for Greece to devalue? Knowing this, who is keeping money in Greek banks?

9 george June 21, 2011 at 2:08 am

1. Greece is not Argentina – there is rule of law in the EU. I am not sure Greek government can change the currency of bank deposits, unless they leave the EU (loosing the EU common market and visa-free travel).
2. There is no sense in destroying hard currency banknotes in order to create soft currency banknotes (that would destroy value). It is much easier and cheaper to just print the new banknotes. The Euro banknotes can be used for foreign reserve and for paying for imports.
3. As far as the new currency will be inevitably hyperinflated, there is no need for high quality banknotes – just print whatever look like money. No one will counterfeit currency during hyperinflation.
4. Whatever you do, no one will use the new currency. New currency, issued by bankrupted state with no foreign-exchange reserves will not create trust. People will hoard Euro and will get rid of the new currency as fast as possible.

10 Martin June 21, 2011 at 1:31 pm

You are horribly wrong on this issue. The common market is a treaty on the European Economic Area standing outside of the EU Treaties. So is the Schengen Treaty — and that is about passport-free travel, not visa-free travel. We never needed visa for traveling in Europe. How would that have worked? 😀

11 Manoel Galdino June 21, 2011 at 2:10 am

How did Argentina ended the fixed exchange rate of Dollar and Peso? People used both currencies domestically… The main problem, I guess, is with foreigners having greek euros…

12 Pawel D. June 21, 2011 at 2:16 am

Technically currency conversion is not a problem. In the last 75 years confiscatory currency conversions were done in most East European countries at least once. In many several times. There also several instances of non confiscatory conversions in the region.

The problem is not technical, but political. If the new currency is worth less than the old currency the real expropriation and the creation of unexpected winners (most black market operators and corrupt officials) and losers (savers, especially those with cash in banks, or expecting future payouts from government) require suppression of popular protest.

To effect such a conversion the government needs military power to prevent a popular revolt, and police power and willing bureaucracy to implement it.

13 Mikko June 21, 2011 at 2:35 am

I think you may be missing a much more interesting question. What would happen if one of the strong countries decided to leave the euro, e.g. Germany?

When it comes to Germany, I think the expectation would be that the new currency would revalue rather than devalue after the switch. Might this change be more doable than switching to new currencies in the crisis currencies? Or perhaps for the more stable part of the euro-zone to split into its own currency union.

On german news: http://www.spiegel.de/international/europe/0,1518,769329,00.html

14 TD June 21, 2011 at 3:09 pm

Thanks for the link above. I can’t help but think about all the similarities between EU and India.

1. A political union of linguistic states.
2. A central govt. that appears remote to its people.
3. A monetary union with a common currency.
4. A transfer union where the more developed states continuously bailout the poor (bimaru) states.

I’m not suggesting a break-up for India; just that Europe could have learnt a lot if it had studied India more closely.

On an unrelated note, one option that we don’t hear about in resolving the Greek crisis is debasing the Euro through QE. An all out QE would probably be disastrous, but it could be added to the existing troika of austerity, haircuts and bailouts.

15 Miguel Madeira June 21, 2011 at 8:48 pm

4. A transfer union where the more developed states continuously bailout the poor (bimaru) states.

This is the big difference from India – in europe the transfer union is not institutionalized

16 Mat June 21, 2011 at 2:50 am

I don’t see why it is necessary, or even a good idea, to convert the euros in bank accounts etc. The threat creates already zombie banks now. And bank accounts are not the problem. If the Greeks want to save in euros, why not? They can do so anyhow, also in the future.

The problem is the too high wage level and prize level. Greece cannot not feasibly change that if the currency “on the street’ is the euro. So require by law the wages to be paid in a new currency, and require the acceptance of the new currency in the market.
That would be enough.

And I think Mikko is right: a leave from the euro by germany, the Netherlands, Finland and Austria (yes, without France) would be easier and more logical. And I think eventually that will happen. But for the greeks that will be too late.

17 Corey June 21, 2011 at 2:56 am

My wife and I were in Paris the day the Euro banknotes were first loaded into ATMs on New Year’s Day. It was amusing to watch the same French waiters that had snarled at our confusion with franc coins on New Year’s Eve helplessly trying to make change for coffee the next morning.

What amazed me about it though, was that only a couple of days later at a nightclub, people were passing around Euro coins and notes from other countries. Then we were already casually receiving the occasional coin in our change that was from a country other than France before we even flew home. Such a large number of people travel so freely between countries in Europe that the coins and bills move a lot more than you might think. There was some novelty factor at the very beginning with people holding onto coins and notes from outside France. It was fading within days, before we left. I’d assume after a thorough mixing over many years, there’s no conceivable way to round up Greek notes or coins at all. They’d be all over the continent and the rest of Europe would not be in the habit of noticing the country on the second face of coins and certainly not the digits on bills.

Of course… there’d be a lot of non-Greek euro notes in Greece too. Trying to do something to reuse the existing euro notes would be very difficult. And the coins would be even harder to mark. Recall that there are no 1 and 2 euro notes either.

I think it is more likely that there’d be some period during which euro notes would be accepted as deposits at banks at face value as euros, but would be deposited only into new accounts denominated in drachmas. Only drachma bills could be withdrawn in Greece at some fixed exchange rate from euro accounts, and obviously from the new drachma accounts. After xx weeks they’d announce euro notes were no longer legal tender in Greece, and you’d need to exchange the euro bills outside the country. The euro accounts would be automatically converted to drachma accounts. Since this is essentially how we saw France go TO the euro it would make sense to leave the currency union in much the same way.

Frankly the notes don’t strike me as the major issue. The bank deposits and all the connective tissue to US eurodollars and so on, the foreign exchange markets, that is MUCH more complicated. Euros were used for exchange for a long time before the notes came out, since the electronic exchange was the bigger issue.

18 wolfgang June 21, 2011 at 3:11 am

Would it not make more sense to have a parallel currency in place for a while?
The Greek authorities would use the parallel currency (the Greek Euro) to pay civil servants, pensioners and contractors. Greek retailers etc. would have to accept it as legal tender and the
government makes sure that the currency initially does not depreciate too quickly.

After a few months when the new parallel currency is in circulation the bank holiday robbery takes place …

19 Fazal Majid June 21, 2011 at 3:50 am

I fail to see how Greece’s hypothetical default would have any bearing on the use of euros as legal tender. Returning to the drachma is a non-starter, no one would accept that currency. All that would happen is that Greece would lose economic sovereignty and control over monetary policy, just as Zimbabwe did when they recognized it was pointless to continue printing the hyper-inflated Zimbabwe dollar, and made the US dollar the de-facto legal tender in the country.

As for a run on the banks, the solvency of the Greek banks is a separate issue from the solvency of the Greek government. I can easily imagine a situation where the ECB asserts control over the former, stripping the latter of any illusion of sovereignty.

20 Kian June 21, 2011 at 4:13 am

Why do anything? There is no absolute need for a national currency. I the Greek government declares that Greece is no longer part of Euro, they no longer need to comply with the restrictions or obligations. It is only a matter of modifying legal tender in Greece.

Denmark does not part of the eurozone but you can still pay with euros in most shops. You may even be able to use dollars, but not at an exhange rate you might find favorable – but still.

If the government want to print a national currency it would only be so they can manipulate it to the detriment of the population.

21 Nicholas Marsh June 21, 2011 at 5:52 am

Using serial numbers or the Greek back on coins won’t work, as has been mentioned, Euros from different countries are all mixed up. Probably more so in Greece than in some other member states because every summer millions of northerners go to Greece on holiday with wallets full of Euros from their counties.

Tyler assumes that the change over to the Neodrachma would have to be done very quickly with all bank accounts being frozen immediately. He is right. If there is any notice then every Greek Euro deposited in Greek banks would be wired out of the country. Greeks would still be able to access their cash – you can use cards from foreign accounts in ATMs, and they could wire money back to Greek accounts and convert it to Neodrachma if its needed. Doing so would incur higher transaction costs (which is why everyone hasn’t done so already), but they would be far far less than the expected losses from a devaluation of, say, 20% or more. Its also easy. Via internet banking, I can wire cash round Europe quickly and without effort (even from an app on my phone).

That’s why a gradual introduction of a parallel currency has a very significant downside. The months that this would take would be preceded by the emptying of every savings account in the country.

Unless the Greek government could prevent all international movement of Euros before setting up a new currency, and force conversion of all Euro accounts into Neodrachma, it would have to deal with a nationwide run on all Greek banks and a flight of liquid assets out of the country. Which wouldn’t be good.

The bigger problem is that I’m not sure that Greece could impose these rules. The EU is based upon free movement of labour and capital. I’m not sure that Greece has the legal authority to take measures to prevent people moving their cash from one place to another (either directly or indirectly by forcing all Euro accounts to be exchanged for Neodrachma).

Even if it could find a legal way to do so, its going to be very difficult to surprise the Greek population. A withdrawal from the Euro would surely follow a worsening crisis. If I were a Greek I would already have set up a bank account in another country, and be ready wire my family’s (very meagre) savings to safety elsewhere.

Of course, these problems would not be so pressing if a Neodrachma were introduced after a failure of the Greek banking system. But lets hope that it doesn’t come to that.

22 snarkster June 21, 2011 at 9:16 am

“He is right. If there is any notice then every Greek Euro deposited in Greek banks would be wired out of the country. Greeks would still be able to access their cash – you can use cards from foreign accounts in ATMs, and they could wire money back to Greek accounts and convert it to Neodrachma if its needed.”

This may be a feature rather than a bug. The best way for the government to get those that matter on board with any currency change (those with significant savings) would be to allow them a sort of grandfather scheme. Perhaps this is exactly what the Greek government is tacitly broadcasting to its citizens: if you have savings in a Greek bank, best transfer it out now.

This would be akin to what unions do when they need to make concessions. The established guard keep their bennies intact and the newcomers get the watered down version. So you would be left with a segment of an older population with savings in Euros in foreign banks (converted to drachmas when purchases need to be made), and all new domestic earnings paid in drachmas.

23 Tartempion June 21, 2011 at 6:16 am

Article 128 of the Treaty is very clear that Euro banknotes are legal tender throughout the Eurozone. Consequently, any coin/banknote MUST be accepted for paiement in ANY Eurozone Member State.

Additionally, tampering with banknotes (and destruction of banknotes) is subject to an authorization an EU level (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:083:0070:01:EN:HTML).

If Greece is to go back to the drachma, it would need to circulate it in parallel to the Euro in the beginning. It is also most probably illegal to forcibly change the denomination of a bank account.

The legal framework makes it impossible to have any scenario described by Tyler. What could happen is that the Greek government would introduce a parralel currency whith which it would pay public employees, pensions, etc. (Argentina introduced some sort of “monopoly money” at some point.) People would probably only gradually switch to the new drachma.

24 Tim June 21, 2011 at 5:41 pm

@Tartempion: ” It is also most probably illegal to forcibly change the denomination of a bank account.”

And this law against changing the denomination of a bank account would be enforced how, exactly?

25 ax June 22, 2011 at 7:08 am

Uh, taking it to EU courts, which have jurisdiction over Greece because Greece is a part of the EU.

26 Tim June 22, 2011 at 1:17 pm

And if the Greek government were to ignore any judgement requiring them to redenominate in Euros? What, kick them out of the EU? I’m not sure that would actually hurt Greece in any way.

27 dearieme June 21, 2011 at 6:33 am

Has anyone written about the end of the Latin currency union – the one involving France, Italy etc?

28 Yannis June 21, 2011 at 7:12 am

@ Fazal Greece has already lost control over monetary policy like most of the eurozone countries(exceptions are obviously the biggest economies of the eurozone). ECB defines monetary policy. Should Greece have monetary control, euro would be already devalueated 🙂

The percentage of Greek GDP to eurozone GDP is about 2,5 % so we can assume that a fair amount is being print by the Greek central bank.
So what i’ m trying to say is that if we (greeks) leave the eurozone – or even kick us out, and at the same time the other countries still want to be a part of eurozone, the logical thing to do is to adjust the supply of money and nothing more. The adjustment of the supply would be a matter of how quick Greeks would spend their euro money on imports.
So in my opinion the question isn’t where the money was printed, but how much should be in circulation for the remaining countries.

29 J Storrs Hall June 21, 2011 at 7:12 am

Indeed, why do anything with the currency? The only thing that needs doing is to rule that the Greek govt can’t issue Euros any more, just like California can’t issue dollars.

Better yet, don’t let ANY govt issue Euros …

30 Miguel Madeira June 21, 2011 at 8:52 pm

“the only thing that needs doing is to rule that the Greek govt can’t issue Euros”

Greek government can’t issue euros, nor any national government of EU

31 k June 21, 2011 at 7:50 am

I really liked the first sentence of this particular post.

32 jk June 21, 2011 at 8:14 am

This is the moment for Bitcoin to shine. Other than the fact it may be hard to purchase daily necessities such as groceries and that 95% of the population will not understand it.

33 snarkster June 21, 2011 at 9:11 am

And hey, it’s apparently easy to steal too, which is a plus for the Greek government and the Eurozone as a whole. No pesky bank holidays needed.

34 TheCrankyProfessor June 21, 2011 at 8:30 am

I heard from some of my students this year in Italy of people refusing Italian and Greek euro change in France. I didn’t believe them…but maybe?

35 Vik June 21, 2011 at 9:45 am

Italians in touristy areas such as Rome continue to sneek in Lira in change for stupid tourists like me.

36 andy June 21, 2011 at 8:52 am

In 1994 Czechoslovakia split – and we got Czech crown and Slovak crown. Surprisingly, the currency split was pretty smooth; the slovak crown in subsequent years traded generally ~ 25% lower than czech crown. However, the incentive to flee was quite low as neither state had a strong incentive to devalue (though, on the other hand, that slovak crown would trade lower was actually quite reasonable to foresee).

37 Ted Craig June 21, 2011 at 10:36 am

Havel claimed they did it in an afternoon, didn’t he?

38 anonymous June 21, 2011 at 12:17 pm

Actually, it was January 1 1993.

At first the two countries intended to maintain a currency union for at least six months, but within weeks of mutual independence the currencies abruptly split too. This may be a model for Greece because the split was not done on a carefully planned timetable, but required hasty negotiations in secret.

They used overstamping. Some brief discussion of the mechanics is here (bottom of page 14 and the following page).

39 anonymous June 21, 2011 at 12:42 pm

Sorry, I should have given that a citation:
Fidrmuc, Jan and Július Horváth, ”Stability of Monetary Unions: Lessons from the Break-up of
Czechoslovakia
,” Working Paper, University of Tilburg, CentER, 1998.

PS, here is the non-broken link to Matthew Yglesias’s Czechoslovak Monetary Divorce post.

40 Dan in Euroland June 21, 2011 at 9:38 am

The Garber paper linked in your (linked) post on the dissolution of the austro-hungarian empire and their currency: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=884919

41 Eric Rasmusen June 21, 2011 at 9:47 am

Here’s another angle. Let people keep their Euro bank deposits. Just introduce a parallel drachma, and say that existing securities denominated in Euros now pay out Drachmas instead. That will solve Greece’s debt problem.
Of course, there goes any aid from Germany and France. I suppose those countries are paying Greece more not to default than Greece would get by default now.

42 Bill June 21, 2011 at 9:56 am

This may be true: “countries are paying Greece more not to default than Greece would get by default now.” but that statement only is true as to prior debt as of this date. Going forward, EU countries have an interest in trading with Greece, and receiving Euros in return. So, the question should be: both as to the past debts and going forward with new debt to finance sales to Greece in the future, is the EU better or worse off aiding Greece now and in the future subject to the constraints. The question I have is on the other side of the coin: is it in Greece’s interest.

43 mulp June 22, 2011 at 2:11 am

Eric, I’m surprised to see that it took until your response for someone to point to the actual problem that Greece has, nd the problem is only made much much worse by Tyler’s proposal.

I have never figured out how anyone benefits from leaving Euro given the problem is the debt denominated in Euros that can’t be paid. As you note, it is the debt that must be devalued, not the “Greek” Euro.

44 mpowell June 22, 2011 at 11:53 am

Agreed. This is a form of default, isn’t it? Is there any historical precedent? It seems like it would be fairly straightforward. You just start paying people in Drachma and demanding taxes in the same. You can choose the initial conversion rate as 1:1; it doesn’t really mean anything. Although you could set different gov obligations at different initial rates, which could be interesting to think about.

Also, I don’t see how you could possible forcibly transfer accounts from one currency to another. Any Greek bank has an account with the ECB. That’s what it means to have an electronic currency. Wouldn’t this forcible transfer amount to seizing those Greek banks ECB accounts and crediting them with matching accounts at the new Greek Central Bank? How would you convince both the Greek banks and the ECB to go along with this?

45 Richard Ebeling June 21, 2011 at 9:50 am

The stamping process that Tyler suggests has its historical precedents. In October and November of 1918, as the Austro-Hungarian Empire was breaking apart, first the new Czechoslovakian government placed a stamp on all Austro-Hungarian National Bank notes on the territory of the new country, as the transition to accepting them in exchange for the new Czechoslovakian currency.

This practice was followed by new Austrian Republic, in Hungary, and former Hapsburg territories in the new Yugoslavia.

Richard Ebeling

46 Richard Ebeling June 21, 2011 at 9:58 am

I explain, briefly, how this stamping and transition process occurred during the immediate breakup of the Austro-Hungarian Empire in one of the chapters in my book, “Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition” (Routledge 2010), Chapter 5: ‘The Economist as the Historian of Decline: Ludwig von Mises and Austria Between the Two World Wars’, pp. 88-141, especially, pp. 92-94.

Richard Ebeling

47 One strange day June 21, 2011 at 10:18 am

Default, yes, but why leave the Euro at all?

With a debt crisis or not, Greece would see a long-term benefit from structural reforms, privitisations and the like. If they leave the Euro, there will be no incentive to carry these out. If they stay, even if they default, the pressure to reform will remain.

Leaving allows Greek labour costs, relative to Germany, to fall immediately, while staying means that they can only improve through inflationary deflation (i.e. inflate, but more slowly than German wages), which will be a slow and uncertain process.

Since more rapid income growth raises the sustainable level of debt, the _minimum_ size of the haircut on a default in the event of staying will be larger than that for leaving.

Now think from the perspective of a Greek person that will be born in 2014. Surely they would be better off if Greece defaulted, but stayed in the Euro? They would inherit less debt and be more likely to live in a modern, dynamic economy.

48 Marian Kechlibar June 22, 2011 at 8:33 am

“They would inherit less debt and be more likely to live in a modern, dynamic economy.”

That assertion tacitly anticipates absence of mad ideologies in that person’s upbringing.

The contemporary riots in Greek streets are basically driven by deep convictions that, against all reality, current sclerotic economy can be kept somehow.

Maybe the loonies can be repressed, but your young Greek will undoubtedly get a fair amount of “eat the rich, all our troubles are someone else’s fault” lessons in school. Not least because, in the public system of education, the teachers are going to feel the reforms on their own skin.

49 E. Barandiaran June 21, 2011 at 10:19 am

Tyler, you should be writing about why both California must continue in the dollar zone and Greece in the euro zone. Your understanding of monetary economics is limited to a theoretical approach that failed long ago and is totally irrelevant to deal with the fiscal crises of both California and Greece.

Your post reminded me of the Austral plan introduced in Argentina on June 14, 1985 –it ended in another round of hyperinflation. And to make things worse you want to complement it with elements of the plans introduced by the rogue governor of Argentina’s Central Bank in July 1982 and by the same person acting as minister of finance in late 2001 (yes, he is the rogue economist with a Harvard Ph.D.). In the 1985 plan, the Austral replaced the Peso as the national currency and a number of measures were taken to reform private contracts, whereas the 1982 and 2001 plans amounted to looting of the bank deposits –since in 1982 depositors escaped from the banks before he could catch them, in 2001 he imprisoned his victims in his famous “corralito”. As I have said many times in my comments to MR posts, you should study Argentina’s history, in particular what has happened since the fiscal crisis of 1951 (and you should also pay attention to what may happen in Argentina the next 12 months).

Hope Greek politicians are not too stupid to pay attention to all the nonsense proposals to get out of the euro zone and to impose the cost of fiscal adjustment on anyone except those that have been looting the Treasury and taxpayers for decades. In the next few days we will know whether this Greek Drama turns into tragedy or into comedy (as defined in the Aristotelean tradition).

50 mulp June 22, 2011 at 2:18 am

You should also point out that Argentina switching currencies and such did not solve its international debt problems.

Argentina defaulted and the debt was written down with the lenders taking a hair cut.

51 Marian Kechlibar June 22, 2011 at 8:38 am

So far, the Greek Drama looks like a farce.

As for currencies: in my opinion, Greek structural problems are so serious, that changing from one currency to another is not going to help them much. If a cancer patient stops eating hamburgers and starts eating broccoli, it probably won’t prolong his life.

I have heard that Greece has a serious problem with sclerotic public sphere, where occupations are “inherited” over decades. Stuff like “almost everyone of the current Greek MPs is a son or a daughter of a former MP, and almost every professor on a state-owned university is a son or a daughter of a former professor”. No periodic change in elites.

Term limits! They would benefit even the US Congress.

52 blah June 22, 2011 at 10:09 am

Someone has an unhealthy affinity for the word “sclerotic.”

53 John Schilling June 21, 2011 at 11:33 am

It is unlikely that Greece would choose, or be forced, to leave the Eurozone. It is inconcievable that any Greek government official or banker will take a proper Euro banknote or coin, a hard currency backed by the German economy, and stamp or otherwise deface it in such a way as to say, “Now backed only by the full faith and credit of the Greek government!”. Hard Euros are valuable assets of which Greece has an inadequate supply. Local printers can provide new paper to bear the promises of the Greek government, whether they are denominated in “Greek Euros” or “New Drachmas”.

And those promises would not be entirely worthless. The Greek government can make at least one promise that matters, that will ensure at least some circulation of neodrachmas or whatever. Specifically, “If you pay us X neodrachmas, we will consider your taxes paid in full and not confiscate your property or throw you in jail for tax evasion. We don’t take Euros.”

That’s one of the standard ways to jump-start a fiat currency, and it can work fairly well. It creates a substantial demand for the new currency, and as there is presumably a limited supply that translates to a finite value. If that value can be kept from falling too fast, the new currency will also be useful for daily circulation – civil servants will gripe about getting paid in crappy Greek Euros rather than the real thing, but they’ll use those crappy Greek Euros to pay for rent and groceries (the grocer and landlord will need at least some of the new stuff to pay taxes, if nothing else).

Forcible conversion of existing bank accounts, or bars on private commerce in Real Euros, are optional.
There’s no way this works out well for Greece, but it can be made to work.

54 Yancey Ward June 21, 2011 at 12:56 pm

If Greek, get your money out of Greek banks, and out of Greek Euros, ASAP?

55 mulp June 22, 2011 at 2:32 am

Greeks are broke so they don’t have any.

But watch out if you have Greek government bonds! Better dump them before the Greek government pays them off in Greek Euros. And then switches back to German Euros and refuses to accept payment of taxes in Greek Euros.

56 Yancey Ward June 22, 2011 at 9:58 am

Mulp,

LOL! It is already too late for the bondholders. And, no, not all the Greeks are broke.

57 brum June 21, 2011 at 2:02 pm

There is a lot of expertize in splitting currencies in Europe. For example Czecholslovakia did in in 1918, 1939 and 1993 (not counting currency reform in 1953). Same in ex Yugoslavia and Soviet Union. The 1993 split to Czech and Slovak koruna was done over the weekend when banks stamped all notes. Coins were were shared for some time, until they could be replaced.

58 Steven Kopits June 21, 2011 at 3:41 pm

Over-stamping a Euro won’t work, because the Greek central bank is not the de facto issuer. If the Greeks stamped a US dollar, it would still be a US dollar. So you need a new note.

On the other hand, if we are discussing this topic, by rights, the run on the Greek banks should be imminent, no? Why would anyone keep any significant Euro holdings in Greece today, when such funds can easily be moved to, say, Hungary?

Indeed, I witnessed a bank run in Hungary in 1998. We were privatizing the postal bank–the second biggest in the country. On the day of the run, emails quietly starting flowing in to the employees of the firm from relatives and friends, suggesting a run would occur. It did, and the bank collapsed–in the space of about six hours.

In Greece, events on the ground may prove more decisive than the plans of politicians.

59 sprivers June 22, 2011 at 1:40 am

Who can tell me on a scale of 1 to 10 the liklihood of Greek ATM’s being closed in the near future

60 mulp June 22, 2011 at 3:16 am

Again, the problem Greece has is it can’t repay debt to German, French, …, US, bank denominated in Euros.

Greece doesn’t have enough Euros.

Switching currency to a drachma Euro only reduces the already too small number of Euros in Greece.

No one will willingly accept payments of Euro denominated debt with drachma Euros.

Switching Greece to a drachma Euro is unlikely to drive Greek GDP growth so much that the Greek government will have so many drachma Euros paid in taxes that Greece can exchange many drachma Euros for one Euro often enough to pay the Euro denominated debt.

61 Vik June 22, 2011 at 8:37 am

The most ironic part of this debacle is that Germany is the biggest defaulter of the 20th century. See recent Der Spiegel online article for more details.

62 Justin June 22, 2011 at 2:29 pm

Here’s a link where you can get a sense of the amount of Euro production per country, and the diffusion across other Euro members…

http://en.eurobilltracker.com/diffusion/

63 David Krych June 22, 2011 at 3:25 pm

Wow, this is interesting. Only 1/8 of the currency in Greece is in Greek Euros. Looks like they’ll need the stamps…

64 Giwrgia June 24, 2011 at 10:45 am

I should at this point like to add that a lot of Greeks have kept many coins and banknotes of the ‘old’ drachma. I myself have several thousand of them stashed away as collectibles.
All one would need to do is just revert to the drachma – most citizens have memory of cost of goods prior to the release of euro. After all it was only released just a decade ago (approx).

65 Giwrgia June 24, 2011 at 10:47 am

…..and external markets might not accept the old drachma, but the Greek market will be boosted internally by lower cost of goods. Citizens could then buy goods at a fraction of what it costs now.

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