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There is quite good precedent in the introduction of the Euro. If you could alter contracts retroactively by law, it is hard to argue that the reverse change cannot be made.
by oliver on Wed May 16th, 2012 at 05:22:01 AM EST
[ Parent ]
There was no retroactive alteration of contracts on Euro entry. What was done is to narrow the bands of exchange rate fluctuations of the predecessor currencies and to fix them at constant rates with respect to the Euro after January 1, 1999. Legally, the old currencies became definite fractions of the Euro and the Euro became legal tender, so contracts could be settled in Euro or in the contracted currency indistinctly.

Symmetric Euro exit would entail allowing the local currency to float with respect to the Euro after a given date while retaining all existing Euro-denominated contracts (which would then become contracts denominated in foreign hard currency). This would destroy both the Greek economy and the creditors' balances.

Euro exit with contract redenomination could be effected in two steps. First, all existing local contracts would be decreed to be redenominated in the local currency at the fixed exchange rate. Then the local currency would be allowed to float. This might be subject to legal challenges as Colman suggests, though I don't think the local courts would uphold the challenges.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Wed May 16th, 2012 at 05:31:13 AM EST
[ Parent ]
Business hates uncertainty most of all.
by Colman (colman at eurotrib.com) on Wed May 16th, 2012 at 05:32:19 AM EST
[ Parent ]
Except when it can profit from it.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed May 16th, 2012 at 05:48:51 AM EST
[ Parent ]
The cleanest way to do this would be to come out on a Friday evening and say six things. "As of right now":

  1. all local contracts in Euros are redenominated in local currency at the 1 January 1999 rate
  2. all outgoing border-crossing cash flows are subject to a stiff tax (but not forbidden - see Krugman on Malaysia, I believe in that case a 10% tax was introduced and then phased out)
  3. all government payments for local contracts will be in local currency
  4. a bank holiday is declared until domestic banks are able to operate with accounts in both Euro and local currency, cash points are stocked with both euros and local currency, and all account holdes are given a separate account in local currency with a starting balance of zero
  5. the central bank has been instructed to print a large enough amount of local currency to cover the cash needs of the economy - this printing and the distribution of the notes to the banks will be completed before the end of the bank holiday.
  6. at the end of the bank holiday, the exchange rate will be allowed to float away from the 1 January 1999 rate.

I wonder whether 1 or 6 could be successfully challenged in the local courts.

2 is a temporary suspension of the free movement of capital within the Single Market. The BuBa is on the record accepting capital controls as a possible "extreme measure".

3 and 5 are a violation of the ECB's monopoly on legal tender. It could be challenged before the European Court of Justice, I suppose.

The only other question is how many days of bank holiday 4 would require. I don't think more than a couple of days after a weekend.


guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Wed May 16th, 2012 at 05:54:45 AM EST
[ Parent ]
Here is a summary of Malaysia's capital-control and other measures.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed May 16th, 2012 at 05:59:19 AM EST
[ Parent ]
And here is Yanis Varoufakis's latest post warning us from thinking Greece could easily return to the drachma (or "local currency").

two important reasons. First, because of the crushing delay in introducing a new currency. Secondly, because of what I call the bifurcation between the stock of savings and the flow of incomes.

by Katrin on Wed May 16th, 2012 at 09:20:41 AM EST
[ Parent ]
Delay: Bank of Greece colleagues tell me that it will take months before ATMs are stocked with new drachmas once they get the go ahead to print them. Even if it takes weeks, an economy cannot remain un-monetised for so long, especially when already on the canvass of a deep crisis, without major civil unrest and an almost terminal effect on economic activity.
Somehow I find that hard to believe, but I will have to.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed May 16th, 2012 at 09:24:30 AM EST
[ Parent ]
Well, then they'll have to deface existing Euro notes by stamping them. It is not like security would be a priority. Nobody wants to render his Euro notes into Neodrachmas.
by oliver on Thu May 17th, 2012 at 08:18:00 AM EST
[ Parent ]
Bifurcation: Even ignoring the crippling effects of the delay, we must not forget that the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in `bricks' of  500 notes).  This means that, by the time we come to an exit from the euro, the stock of savings will be in euros and the flow of incomes and pensions (once the banks re-open) will be in drachmas. So, unlike in Argentina, a Greek euro-exit will drive a wedge between stocks and flows, savings and incomes; with the former revaluing massively relative to the latter. Moreover, the very availability of such large quantities of `hard' currency savings, in the hands of the average Dimitri and Kiki on the street, will ensure that the decline in the value of the new drachma will be precipitous (something that did not happen in Argentina since most savings were in pesos also).
And, after the Greek President's little announcement yesterday, we know this is not a hypothetical.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed May 16th, 2012 at 09:26:04 AM EST
[ Parent ]
I yield, Yanis wins.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed May 16th, 2012 at 09:29:29 AM EST
[ Parent ]
According to Kaminska on FT, the bank run has hardly even started :

FT Alphaville » Plug-pulling in Athens

OK -- not really a surprise to see deposit withdrawals and a flight from Greek euros now, with a euro exit in the air, you might think. But in a way it is.

The amazing thing about the Greek banking system since 2009 is not just the 25 to 30 per cent of deposits that have left, but the 70-75 per cent which have stayed. They have stayed through two years of Greece transparently getting closer to leaving the euro and turning these deposits into drachma. We're being serious. It's a real challenge to prospect theory. Up to €170bn remained in banks at the end of March.

Although deposits clearly do respond to politics -- the Greek President made that fairly clear this week -- they have tracked the rate of Greece's economic decline since 2009 pretty closely too. Maybe that says something about general pressure on Greek household wealth, as a driver of deposit flows. In any case, depositor flight has been what Gabriel Sterne, an economist at Exotix, has previously called a `bank jog'. Something to think about. What it becomes now with a month to go before fresh elections is another question.

Her conclusion : when it really gets going, the ECB will inevitably pull the plug on the Greek banks.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed May 16th, 2012 at 09:36:54 AM EST
[ Parent ]
There are two things you can do when there's a bank run.

One is to observe that there are no queues of angry depositors because they all use online banking, call it a "bank jog", and use the ELA to paper over it and enable a continued capital flight from the country.

The other is to put the bank into receivership.

I am reminded of this

[Spain's] economic vice-president Pedrio Solbes; the president of [the Autonomous Community of] Castilla La Mancha, and trade unions denounced yesterday the campaign of "rumours", "harassment" and "disrepute" that Caja Castilla La Mancha (CCM) suffered over the past year and which translated into a flight of approximately €2bn, according to [Communist trade Union] CCOO. The exit of 11% of deposits, added to the bad management of the entity, made Sunday's State intervention inevitable to guarantee its normal operation and reassure depositors and creditors of the Caja.
Greek banks have steadyly lost 30% of deposits over three years, so they lost 10% each year, so going by what happened to CCM, that should have been enought to force them into receivership so, yes, I call it a bank run.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed May 16th, 2012 at 09:56:51 AM EST
[ Parent ]
So don't exit, just start issuing New Drachmas at 1:1.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed May 16th, 2012 at 10:46:03 AM EST
[ Parent ]
It could remain fixed, after the Greek Government starts issuing Drachma and legislates that Drachma are also legal tender.

Though introducing a New Drachma at 1 ND to 1€ would be simpler.

Allow all those who owe taxes on incomes received in or transactions paid in ND's to pay those taxes in ND, and there need not be a problem of discrimination between Greek and other EU citizens in Greeks being allowed to pay taxes in ND and other EU citizens being forced to pay taxes in €.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed May 16th, 2012 at 10:38:41 AM EST
[ Parent ]
Issue debit cards.

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Wed May 16th, 2012 at 11:06:21 AM EST
[ Parent ]
Still need cash, but if the Euro is not removed as legal tender, the ATM machines can dispense Euro's until the banks have New Drachmas to put in the machines.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed May 16th, 2012 at 11:34:43 AM EST
[ Parent ]
If the Euro is not removed as legal tender, the drachma will not be accepted by anyone.
by Katrin on Wed May 16th, 2012 at 11:38:07 AM EST
[ Parent ]
So you are reckoning that all stores and shops will successfully collude in all defying the legal tender law, and no store or shop will break ranks and accept the New Drachmas in payment?

What about credit card transactions? With banks free to decide between transferring Euros or Drachmas to complete the transaction, I'd be very surprised if they choose to transfer Euros.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed May 16th, 2012 at 11:46:34 AM EST
[ Parent ]
If I have the choice, because both is legal tender, give me Euros. The drachma won't remain pegged to the Euro, it will become weak. Besides, I can use Euros to buy foreign goods, but don't believe I get them for drachmas. What do you think why there is a bankrun? People want to see their Euros in safety (and I bet you would do the same if you were Greek).
by Katrin on Wed May 16th, 2012 at 12:07:42 PM EST
[ Parent ]
However, as a seller, your choice would most often be between accepting ND or no sale.

Those wishing to convert ND's to Euros without having approved transaction to spend the Euros on would indeed have to pay a premium ~ that is, indeed, part of the point of a New Drachma reform, in addition to the government being able to spend ND's on direct employment programs ~ but the settlement rate for qualifying tax obligations and contracted payments would remain 1:1.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed May 16th, 2012 at 12:28:21 PM EST
[ Parent ]
But the one who has the choice is the one who pays, not the one who receives. Under the rules Bruce proposes, any tradesman who accepts payment in Euro would also have to accept payment in New Drachma.

In practice some tradesmen will refuse to accept ND, but most will accept them at a discount.

The thing is that if you take someone to court - over, say, a debt - he would be able to pay in ND rather than Euro, at no discount. So the creditor has a fairly substantial incentive to come to an arrangement.

What this means is that:

  1. Debt will be effectively rebased to ND retroactively.
  2. Large purchases of imported goods - automobiles, machine tools, large-scale engineering, etc. - will instantly transition to the ND footing going forward. But those are typically purchases that can be deferred for a month or two while the monetary system shakes out, without riots in the streets.
  3. Small purchases, such as going to the grocery store, will transition more gradually, as Euros remain viable means of payment at (or at least not greatly above) pre-crisis prices while the €-Mark/NDrachma exchange rate shakes out.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 16th, 2012 at 12:30:21 PM EST
[ Parent ]
The discount would probably be very high, because the obligation to accept ND is practically unenforceable. Only a small percentage of debts go to court and so on. I am not convinced. We could only hope that the ECB thinks it would work and starts to negotiate.
by Katrin on Wed May 16th, 2012 at 01:30:15 PM EST
[ Parent ]
Shops & stores can make lease payments in Neo Drachmas. Shops can make VAT tax payments in Neo Drachmas if they accepted payment in Neo Drachmas. Shops can make utility payments in Neo Drachmas. Shops can pay wages in Neo Drachmas.

So the question is whether shops can get merchandise for sale for New Drachmas. For approved imports within the government ability to meet Euro claims at 1:1, that merchandise can be obtained for Neo Drachmas.

So the critical element would be an agreement by the Chinese to extend RMB¥ credit payable in some agreed ratio of €:NeoDrachma.

Given that, there would be shops who would take the Neo Drachma, and given that shops who take the Neo Drachma will have booming business while shops that do not will see business dry up even more than today, resistance to taking Neo Drachmas will either be resolved in hold-outs giving in or hold-outs closing up and their place taken by those who accept Neo Drachmas.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed May 16th, 2012 at 01:48:33 PM EST
[ Parent ]
The discount would probably be very high,

Potentially.

That the collapse of an overvalued currency peg sucks is not something any sane person would deny.

It's just that unilaterally attempting to maintain an overvalued currency peg sucks worse.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 16th, 2012 at 03:02:55 PM EST
[ Parent ]
Apparently what we are discussing here is moot anyway. And Greece hasn't got a government to react.
by Katrin on Wed May 16th, 2012 at 03:57:08 PM EST
[ Parent ]
It has been moot for over two years by now, since that's roughly how long it's been obvious to anybody who was paying attention that this charade could not continue.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 16th, 2012 at 04:05:43 PM EST
[ Parent ]
Haw about Gresham's law? The Euro would be hoarded and cease to circulate. Everyone would claim (falsely) to the store owner that they have no Euros at hand. The shopkeepers would claim (falsely) that they can only return change in NeoDrachma because they have no Euro coins, etc.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Thu May 17th, 2012 at 06:05:47 AM EST
[ Parent ]
Because you want to reflate the money mass. I suppose in conjunction with cross-border capital controls you can keep the peg.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Thu May 17th, 2012 at 06:07:05 AM EST
[ Parent ]

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