06 October 2011

Kathimerini: Nightmare scenario of a return to the drachma

With the real exchange rate between the drachma and the euro weaker by 120 per cent, the euro would become 2.2 times stronger in comparison to the original drachma-euro exchange rate (around 750 drachmas to the euro), a percentage that the analysts find neither unreasonable nor excessive, if it helps deal with the country’s deficit immediately.

According to HSBC, the possible exit of Greece from the eurozone would also ultimately signal its exit from the European Union. The consequences of such a scenario would be devastating, according to the global banking and financial services company, which lists the most likely effects:

1. The nominal value of the assets and debts of the banking system would have to be calculated anew in order to devalue the currency.
2. There would have to be a system of capital monitoring because of the massive current exchanges deficit, but also in order to put a cap on daily withdrawals in order to protect the banking system from crashing, given that it would no longer have access to the liquidity of the European Central Bank.
3. A default would not avert the need for fiscal adjustment as the budget would continue to show a deficit, meaning that more austerity measures that are even more stringent than those required by the current Memorandum would need to be enforced. Assuming that this is politically possible, the Bank of Greece would have to be in charge of printing money.
4. The ensuing downward spiral of salaries (especially if the Bank of Greece is printing money) would kill any chance of boosting competitiveness, unless the country went ahead with radical structural reforms.
5. A return to the drachma would entail an enormous number of technical difficulties, not least of which would be rewriting all of the codes of exchange and reprogramming ATM machines.
6. Greece would be forced to exit the European Union, meaning that it would be liable to non-EU member trade regulations.
7. A Greek euro exit would spread the crisis to other countries on the periphery of the eurozone and would trigger an explosion in the spreads and massive capital flight from banks.
8. The credit crisis that would result from a Greek exit would make the 2008 crisis seem mild by comparison, as the global economy would sink into a deep recession.

Full article

© Kathimerini