Why it’s hard for Greece to back out of the Euro

Talk of Euro abandonment would trigger an immediate run on Greek banks, sending the country into an even deeper hole.  Who wants a Euro deposit to be converted into a drachma deposit?

You could imagine keeping current Euro-denominated deposits and adding new drachmas to the system, circulating at a flexible exchange rate.  That still might trigger a bank run (who expects the parallel currencies to last forever?).  Furthermore the new drachmas would bring seigniorage only if the law forces their overvaluation in some manner; refer back to the earlier discussion of the bank run.

You could imagine a surprise freeze on all bank deposits, thereby preventing an immediate bank run but leading to a later bank run.  Plus in the meantime there is no working banking system.  And if this doesn't come as a true surprise, you end up with the immediate bank run.

What is the chance of a bank run very soon — if only driven by "sunspots" — thereby forcing the Greek government to suspend redemption and devalue those deposits, effectively turning them back into drachmas?

Looking to history, there are plenty of countries which break pegs or leave currency zones.  But they all seem poor enough, banana republic enough, or insulated from "currency competition" more than a new Greek drachma would be insulated from competition with Euro-denominated banking.

Have I mentioned that currency substitution models do not in general imply stability or well-behaved quantity theory relations?

Can you see any coherent scenarios in which Greece (or other EU countries) can leave the Eurozone?  The forcing, immediate bank run is the only option I see and that is not a pretty one.  It also implies that the "policy decision" is up to Greek account holders and not up to the Greek government.  At best, the Greek government is making decisions about the fiscal side of the equation.

Are the nominal interest rates rising on Euro-denominated accounts in Greek banks?  (Are they allowed to rise?)  That is one good barometer for Greek depositor discontent.


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