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Can Greece "Just Print Drachmas"? Goldman Answers
A few days ago, in advance of the new Greek parliament throwing in the towel in its negotiations with the Eurogroup and conceding to virtually all demands, we showed what, in a worst case scenario, the new Greek currency would look like using data from a previous News247 report. Some of the proposed samples are shown below.
But how realistic is a Greek monetary conversion out of Euros and into a "Nea Drachma"?
For the answer we go to Goldman, which after late last week reported that the possibility of a Grexit is now substantially lower...
... the Greek government chose the solution that would be the least costly to the economy and the country overall – that of the acceptance of a mutually agreeable framework in order to continue negotiations for an updated Greek programme. And this rational choice is significant as it reveals the reaction function of Greek officials.
It also notes that "GRexit is not the binary event it is often portrayed to be. Transitioning from the Euro to a new national currency is no straightforward task either for Greece or for Europe to pursue."
Goldman then proceeds to explain "why Greece can’t just (re)introduce a national currency."
Here is the full take why, at least according to Goldman, Greece really has zero leverage even when threatening with a Grexit, something which after the February negotiations, it most likely will no longer do, at least until another, even more "radical" cabinet takes power.
Debt Unpaid is Not Debt Forgiven
One of the first and most important issues to understand is that Greek debt structure does not resemble that of other Euro-area nations. The loans given to Greece as part of a) the first Greek Loan Facility, b) the EFSF/ESM-funded second Greek programme and c) the IMF sum up to more than EUR200bn, or 2/3 of the Greek debt stock. For all intents and purposes, they are foreign treaties with other governments and failure to pay them does not lead to an automatic write-off, particularly as maturities of those loans are primarily 15-30 years in the future (except for IMF loans that mature in the years ahead). They also cannot be redenominated.
Furthermore, about half of Greece’s marketable debt of EUR66bn is in foreign law as a result of the PSI bond restructuring. There are also cross-default complications with the official sector as part of the co-financing agreement.
Overall, failure to meet obligations would not lead to a default and write-off of part of the debt stock. Instead, liabilities would most likely run in arrears that would need to be paid off before Greece could ever tap financial markets. And costly litigation would probably drastically reduce the flow of EUR funds in and out of the country.
There is of course the possibility of a mutual agreement on a write-off of a significant chunk of Greek debt following an exit. But that voluntary restructuring of official sector debt would require concessions on the Greek side. In the current Euro-area set up, this would probably involve a new MoU with fresh conditionality backing a “recovery” programme. And such an option is already on the table, at less punitive terms for the Greek economy. It may also take time to reach such a consensual agreement during which the Greek economy would come under severe strain.
Secluded from International Capital Markets, Greece would not be Able to Issue a Globally Traded Currency
With senior liabilities outstanding, Greece would be secluded from international capital markets. This would not just hold for the Greek government. It is likely that the implications touch the Greek private sector too, with Greek exporters and importers not being able to rely on letters of credit provided by Greek institutions. In such a case, Greek trade would collapse to the level that can be sustained by cash businesses in Euros.
Should a Greek currency be introduced following failure to pay, it would likely have very limited convertibility into Euros outside Greece. It would purely be a means of internal transactions, in all likelihood.
But is this an equilibrium solution for Greece? No. Because in such an event, it would be hard to convince even the Greeks to hold any drachmas. Put simply, while public sector employees, pensioners and government supply providers would be paid in drachmas (and be expected to pay part of their tax liabilities in the new currency), they would not be able to use that currency to buy imported goods. Exported goods would also become too valuable to be bought in drachmas, as they would correspond to hard currency receivables. Anticipating this, even providers of domestic services (taxi drivers, hairdressers etc) would avoid receiving payments in drachmas if possible.
If at all, the drachma would trade at a huge discount to the Euro. The economy would remain largely euro-ised but without a natural source of Euro-liquidity.
Drachma Would Prove An Unsustainable Means of Taxation
Ultimately as we discuss in our note with Huw Pill, it would be very hard for Greece to introduce a viable new currency unilaterally. Baring the complications of actually printing a new note, such a move would likely lead to a collapse in Greece’s international transactions and trade (both for the government and the private sector), would expose the country to litigation risks and trigger a significant destabilization of the banking system.
The only function of such a new currency would be to “tax” parts of the population that would not naturally receive hard currency as part of their payments structure. But that tax would not lead to a natural increase in government receivables as the economy (both the internal and the external economy) would shrink in a downward spiral.
The equilibrium outcome of such a situation would be a deep recession that would help build current account surpluses despite declining export activity. Once such recessionary surpluses were realized, a natural flow of hard currency would be established, which would help Greek authorities start meeting external financing requirements again.
As we conclude, we would like to point out that this is a highly theoretical exercise. We do not think that such an outcome is either desirable or feasible by the current Greek leadership. Instead, this exercise is meant to illustrate the strong disincentive for unilateral default and currency introduction from the Greek side.
In other words, sorry Greece: you are stuck: according to Goldman you can't go back to the Drachma, even if you wanted to.
And now, let's focus on the Greek government using the "far more sustainable means of taxation", the Euro, where the new (and all previous) governments have shown an amazing inability to actually collect.... regardless of what currency is used.
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Lies. Usually there is no domestic attempt to replace imports. What happens is the middle class panics and refuses to invest in a "uncertain environment" and flees en masse, leaving uneducated peasants behind.
The point about converting Drachmas to Euros is obvious, but then again at what exchange rate? The rate cannot be decided by politics, its all about supply and demand for foreign currency which is really a matter of trade. If greece wants stable money, it needs to export.
Greeks would be better off allowing free circulation of foreign currency in their country. At least the people would not panic and move their money or themselves to Germany. Those entrepeneurs that would be doing the import substitution need some sort of currency stability, otherwise its Venezuela with its 6 exchange rates (ranging from 6.3 to 170 per dollar).
@binny. Read up on Rhodesia post UDI. Or any number of post colonial basket cases whose currency couldn't stand on its own feet once the colonial power left. Lots of opportunities were created, Exports generated hard currency, which usually the govt liked to keep for its own use, to buy military shit, etc. As a result there was no hard currency for all manner of stuff that was previously taken for granted. Enter the local entrepreneurs. A lot of people don't like to up sticks and flee their country just because the money runs out.
Really? Rhodesia is the development model Greece needs to emulate? Rhodesia became a shithole.
Lots of moneyed or educated people do leave their countries when things like this happen. It happened in Cuba and is happening in Venezuela. Those who remain do so because they are either:
1.-Patriots (Murika!)
2.-Uneducated, and cant make it overseas.
3.-Lazier than those who left early.
4.-Holding out for better times, without doing any investment. I spent a decade hearing that line.
the feeling apparently is that if a country does print its own money, then it must be worthless. Hey, Argentine currency was pegged to the US Dollar at one time. It got expensive, but the Greeks could make something like that work if they were careful enough.
The peg only worked because they burned their reserves to supply the market. The argentinian government sold everything for dollars to supply the market to support the peg until one day it ran out of railroads to sell. Then the peso went from 1 peso/dollar to almost 4 pesos per dollar almost overnight. Because there were too many pesos and not enough dollars!
Greece should quit paying their "fake" debt (which was merely a fictitious computer entry by the ECB et al).
Get out of the EU.
Exchange the Euro for Dollars and start using the U$dollar as it's currency right away.
How to turn a new issued Dracma from Cinderalla to a valuable currency ?
Link it to SILVER . What then Goldman Sachs ? Attack the price of silver ?
I doubt if there would be any delivery though. Perhaps they could link it to silver contracts? and just roll over the contracts every month for pennies on the drachma. Hang Goldman and JPM with their own rope maybe.
Greece does not have enough silver. Its not about silver, gold or fiat, but trade. Greece needs to export more.
Why is everyone brainwashed with the idea that if Greece default on their debt they have to print there own currency?
Sump'in to do with controlling your own destiny.
Manhood.
Right, Greeks being forced to take their government fake fiat is better than using the EUs fiat, which is accepted worldwide. Leaving ideologies aside this sort of thing ends up in massive devaluations until Greeks reach a poverty equilibrium.
I think the reality is that every pure socialist country requires their own currency.
They should bring back the Drachula
"In other words, sorry Greece: you are stuck: according to Goldman you can't go back to the Drachma, even if you wanted to."
Huh? Isn't that the point of a sovereign currency that you just issue your own? All they have to do is get Russia or China to cooperate, or any other number of non-Euro and non-USD countries. Newsflash, Goldman, there are over 180 different countries.
United States citizens in the same boat. We are slaves. We will be taxed through the ACA, FCC, Carbon Tax, Federal Tax and any other TAX to pay for the fiscal deficit that was accrued by socializing all the bad debts of the banks on to the deficit. That is exactly why the IRS was formed at the same time as the Federal Reserve. Yes the dollar is supported by the ability of the Govt to exact taxes. Note the big jump in the dollar when the FCC net neutrality was passed. Up $1 that day. Net neutrality is another name for new taxes. I am sure the capital gain taxes within the Dow run are phenomenal.
Greece needs to seriously bite the bullet now and Grexit. At least they can enjoy debt free unemcumbered cash flow to try and solve their social problems. They have tourism, they have exports, they have natural resources. They will have to figure it out. BUT get off the debt bus to hell.
If the newly elected Greek government was serious, they would have issued arrest warrants for past government officials, banksters, and GS for the SCAM of Greece.
They didn't and probably won't.
Some good comments here, but the BIG difference between having the Euro and Drachma is that Greece cannot print its own Euros, because it has to borrow those from the Central Bank. If, on the other hand, it produces drachmas and pegs those to the Euro (1:1) then Greece could proceed cautiously as a member of the EU and have its own currency. UK has its own currency still, not euros. I think the original intent of having a common currency was trading between banks, not a more generalized unit among countries.
the advantage of having your own currency then is that you can print drachmas -- and maintain the same rate of QE or inflaitonary printing that the ECB is carrying out. That at least gets rid of that whole borrowing paradigm. Maybe that is why the UK prints their own currency.
FUCK GOLDMAN, Greece default NOW!.
Greece certainly can and should leave the EU, and continue with the Drachma. Other than invading, there really isn't a lot the EU could do about it. Sure they could exclude convertability of the drachma, but the EU will have so many other problems after Greexit, it wouldn't matter. Soon the euro wouldn't exist anyway, so big deal on non-convertability. Also Greece could form other trading block partners, like Russia/China, which the EU wouldn't like very much. That might be enougfh leverage to be left alone. The only problem I see from the Greek standpoint is that once Greece is cut loose, free of debt, they are going to need to enact smart reforms. I don't see the current marxist leadership up to that task.
Good for the goose....good for the gander.....ctrl P.... Drachmas Baby! Yeah !
And of course you get nothing ECBFKRS ET AL ! SUCK IT BABY YEAH !
Now let's all dance in a circle snap our raised fingers and get smashed on OOOOOOOOOOOOUUUUUUUUZZZZZZOOOO good !
Cautionary tale for anyone foolish enough to adopt a common fiat currency. This should always be remembered.
Well you would expect this response from the most corrupt bank in the world.
Greece should simply default and tell the Germans to take a hike. They will never have to pay back the bailout loans of 300 billion euros. They should reinstate the drachma, take the expected devaluation, get a bridging loan from the BRICS bank, and start their economy rolling. With a concerted effort from all Greeks to do the right thing, they can make it work.
In a few years Greece will be a prosperousv and desireable country to take a holiday.
Greece has 112 tons of gold reserves....
The value of which is some $4.5B.
They could therefore issue a currency 5% backed by gold giving them $90B of cash money supply.
The M0 of the UK is only 70B GBP, and the M3 in the UK is only 50% of GDP.
Since Greek GDP is only 242B, they are almost there, the numbers are OK.
The market would love a gold backed currency.
If Greece slashes the tax rates and invites corporations in at say 15% like Hong Kong, Singapore and Switzerland do... Greece could become the New Swizterland.
It's all entirely possible.... Greece needs to appeal to the free capital markets, not the lawyers and bureaucrats.
Right, and what happens once they need to pay their foeigh suppliers? The 4.5 billion dollars in gold will vanish in days, unless someone agrees to keep Drachmas as part of their foreign reserves. Even then the 90 billions would vanish in months.
Greece needs to export more than its gold reserves. It is not industrialized, thus it cant, thus it will remain poor until it industrializes.
Industrialization needs a base of talented and well paid scientists and engineers. Greece is abusing its scientific base (Doctors being forced to prostitute themselves, amirite?). It will become poor and loose its talent. It will take generations to fix the damage.
THIS ARTICLE IS WRITTEN BY THE VERY INVESTMENT BANK THAT HELPED UNDERWRITE THE VAST AMOUNTS OF DEBT ISSUED 'FOR' GREECE. BUT REALLY FOR CORRUPTION AND LOTS AND LOTS OF BRIBERY AND EMBEZZLEMENT . MUCH OF WHICH WAS PAID AS FEES TO GOLDMAN FOR CREATING THIS DEBT.
UNREAL.
I'm sure the Russians and the Chinese would take the Drachmas along with some others. They need to spend the rest of their Euros on food and medicine and wait until the big reset. They will not be the only ones restructuring debt.
What would Russia or China do with Drachmas?
Buy hotels, build ports, etc.
Greece could use Bitcoin and connect to the Russian and Chinese SWIFT knock off. It'd give it a try.
Fuck the EU.
That's the whole point.
Adolf Hitler's Germany has proven how this is to overcome: Nazi Germany introduced a bilateral clearing system for barter trade. You buy machinery and owe us the corresponding amount of money and we buy what you have to offer which reduces our surplus. It worked brilliantly without networked computers - it would work even better today.
Another benefit of this system: overall it supports trade equilibrum.
The international hyenas being excluded from parasiting on the productive nations trade? That's like a desinfect for bacteria.
Similar system the Russians and Chinese have started already...
Greece has little to offer.
Greece is attractive to tourists. And it produces agrar products.
Ofcourse their standard of living would not be as high like the one in Germany, but they also do not work as hard as Germans work. Their life is much easier.
The other possibility is what they have now: bancrupt debt slaves, 50% of their youth unemployed and therefore destroyed and their country being grabbed by the international hyenas.
Being free and souvereign or being a debt slave? It's their decision. But the argument that there was no alternative has been proven wrong a long time ago. And with Russia and China already setting up similar trade agreements, there probably would be ways for Greece to cooperate.
But ofcourse this means that they would need an intelligent and open minded government and most important, they would need to BECOME FREE. Which I think probably is the REAL problem: today's masses give a sh.t if their nation is a slave, all they care is their personal wellbeing. But there exists no freedom without solidarity.
Sending those youths to farms is an euphemism for poverty. Young people tilling the soil with oxen on family farms are poor.
They have no way of being wealthy and will stay poor for at least 2 generations.
Im not offering a solution. Im not saying Goldman is right or wrong. Im saying they will be poor and stay as such for a long time. They are going back to their "roots".
Working on a farm is not better than 50% of the youth being unemployed with no future but debt?
It is exactly THIS mentality that makes the Goldmans rule and grab the whole world. Live beyond your means, take my money, become a debt slave.
Freedom has a price. The free man is willing to pay it - the slave not.
Never said it was better or worse. It is what it is. If poverty is the greeks natural condition it will be.
So true.
I went on a 20,000 bicycle tour years ago. Lived on about $5 dollars a day.
Never felt freer, happier, or more satisfied. It's like having a lifetime of enjoyment and memories in less than three years.
Most people throw their lives away to do their lords' and masters' biddings.
You just helped me figure out what I am going to do in a few years when I retire; feel free to add where you went and how you got back by, thanks.
All those people look worried. Now, just look at that confident smirk Ol' Ben Franklin has, that's how your supposed to pose for a portrait.
So it means that it is a good idea... to get out?
Greeks cannot be worst than they already are... realistically.
The issuers of the credit should really go f....ck themselves. Actually they are getting there, I do not need to tell them to go there... they will just slide there... and f....ck themselves. Wait... I fear they already are...
;-)
looove your style !!!!! :)
Should a Greek currency be introduced following failure to pay, it would likely have very limited convertibility into Euros outside Greece. It would purely be a means of internal transactions, in all likelihood.
If Greece instituted a properly managed Medium of Exchange, one which guaranteed zero INFLATION of the MOE, one that freely certified traders new promises to complete trades, one that precisely monitored DEFAULTs and collected a like amount of interest, one that recognized governments with their rollovers (DEFAULTS) for the deadbeats that they are, Greece could earn the premier status for their MOE that they have earned for their shipping skills.
No one else is doing it ... and they're going to need a local currency anyway. With this currency having the characteristic of never losing it's value, it would soon be accepted, even coveted, in international trade. The only impediment will be their government that would then have to get along on tax collections rather than stiffing lenders.
Lats time Goldman "adviced" Greece and its leadership we ended up with 5 years of misery and a shitload of more debts...Sorry I will pass on their advice and wait for someone else.
oh by the way...you see that guyy on the 10K note? You should all print his face, frame it and put it on the wall of your living room as your mothers, sisters, wives and daughters owe their lives to HIM.
A poor little doctor from a Greek village that discovered how to diagnose ovarian cancer with a simple test and gave his knowledge to the world free of charge, His name was Dr Papanikolaou and your women call it the PAP TEST.
Just an other cheat, tax evading, lazy Greek like me.
Goldman go down on a Grexit is what this tells me.
What is this shit,
a page if turgid bollox as far as the eye can see.
Hasn't fucking GS got a fucking deal signed yet to be appointed banker by Russia and China when they fund Greece and they are lead underwriters
What the fuck are they playing at. Have they forgotten how to stitch country's up