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Market Implies Greek Devaluation To 1530 Drachma Versus Euro

Tyler Durden's picture


On the day when Greek 1Y yields broke above 400% for the first time, a consideration of just what Greece would look like post-exit is perhaps fruitful. Looking at hypothetical forward rates (generated from covered interest rate parity between EURUSD FX and EMU sovereign interest rates), MSCI has an interesting analysis of what a decoupled Drachma (and for that matter Lira, Escudo, and Irish Pound) would look like. Given the Greeks entered the EMU in January 2001 at 340.75 Drachma to the Euro, the current market is pricing in a massive devaluation to around 1530 Drachma to the Euro. Perhaps as further evidence of the market's perspective that a devaluation is likely, from extremely high correlations just over a year ago, the implied new Greek Drachma vs Euro has dropped to almost negligible correlation against an implicit Deutschmark vs Euro. As the PSI discussions go from bad to worse (as we expected and discussed yesterday), it seems the market is increasingly expecting at best a coercive agreement (if not outright exit).

The implied forward exchange rates (inferred from interest rate parity differentials) across the various peripheral European nations (as of mid December). This is the devaluation against the Euro so a ~4.5:1 devaluation as is evidently priced into Greek curves implies the 340.75 Drachma to Euro rate will devalue to around 1530 Drachma to the Euro. The Portuguese are obviously better but face significant devaluations also.

And the decreasing correlation between an implied Drachma and Deutschmark suggest the market is increasingly expecting this exit or devaluation to happen. This is evident when one notes that even 1Y GGBs are now breaking to record yield levels - over 400% for the first time today:

Source: MSCI

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Thu, 01/12/2012 - 14:15 | 2058953 ACP
ACP's picture

BULLISH! Take it and bid it!

More money means I can buy more stuff right?!?

Thu, 01/12/2012 - 14:30 | 2059029 Silver Bug
Silver Bug's picture

Going back to the Drachma is the only realistic option the Greeks have left. Don't get me wrong, that will implode within of year or two of it's issue as well.



Thu, 01/12/2012 - 15:06 | 2059197 crawldaddy
crawldaddy's picture

the longer they wait, the worse it will get.  They should of bailed on the Euro last year.   It doesnt pay to be a team player if your position on the team is piss boy.

Thu, 01/12/2012 - 20:46 | 2060259 Buck Johnson
Buck Johnson's picture

No kidding, the only ones keeping them in are the handpicked technocrates that are running Greece.  Much of the market believes that Greece will exit the Euro and default, because how in gods name can they afford more debt when they can't pay the debt they already have.  Also this "voluntary" cut of the debt that they are wanting private institutions and individuals to do isn't possible, even with that sad attempt at changing Greek law saying they have to do it if a certain percentage agrees.  Because for one, any attempt like that or change is considered a Credit event pure and simple.  And if it's a credit event then they can run to the insurance companies and get 100% on their money back instead of taking any cut.

Two, who would take this deal anyway I have insurance in case of a credit event and I will take 100% over 50% or really 15% cash because the 35% in debt is as much guaranteed like the other debt.  What isn't being said and being looked over all this time is the banks and insurance companies that insured this debt.  If you the EU (I still say America should be forced to bailout this more since it's their banks and insurance companies on the line) and the ECB are more concerned about not having a credit event and having the insurance pay out, whats with the concern.  UNLESS THE BANKS AND INSURANCE COMPANIES IN THE US DON'T HAVE THE MONEY TO PAY ON THE INSURANCE!!!!!!

And if they don't, then whatever bonds they are holding is worthless and who's to say that the insurance will payout in the future anyway if a credit event happens.  Also there is the CDS that where made and paid for by institutions and private people that don't own any of the debt, just the CDS.  So what about them, they have been paying their insurance fees (along with the bondholders) for years and for a change to happen and not call it a credit event isn't possible.  It's essentially adhoc law that the EU would have to do and if they do that it threatens all the debt in the EU because who's to say that the insurance companies will payout or the EU will allow you to collect (which I still say they have no leg to stand on, they are just browbeating) 100% on the insurance in case of spain or other countries in default even to go back to Greece which will be in trouble again.

If I was the EU or running the ECB bank I would go to Washington and tell the Fed that they have to backstop this debt and if not the whole deal is done and the event will happen.  And it won't be on the 26 billion dollars but the whole Greek debt which is at least 300 billion (I think it's more).  Imagine the banks and insurance companies having to payout on 300 billion dollars at once.

Thu, 01/12/2012 - 20:03 | 2060198 YHC-FTSE
YHC-FTSE's picture

Yeah. On the one hand I wish they would just get on with it. On the other, there will be the shitstorm in the markets - maybe the biggest banking/insurance crisis in history, and the Greeks will be VERY lucky if they get 1530 Drachmas/Euro. Ratio is likely to be in the tens of thousands to one if history repeats itself.

Thu, 01/12/2012 - 20:13 | 2060212 smiler03
smiler03's picture

I used to holiday regularly in Greece, Portugal and Spain. Everything was ridiculously cheap compared to home (the UK). Even going to France was cheaper than staying at home.

And then came the Euro.

Goodbye forever to cheap holidays.

BUT WAIT!! There is a brighter cheaper future ahead. Roll on the end of the Euro hyperinflation monster!

Thu, 01/12/2012 - 20:34 | 2060240 YHC-FTSE
YHC-FTSE's picture

I remember those days. I used to pop over to Calais every December to do the Christmas shopping until about 8yrs ago. My mum used to force us to go on coach tours of Greece when I was a little nipper and we weren't well off in those days. 


Sure, the Greeks will eventually have a better future, and we'll have fun paying 1970s prices for holidays there, but they will have a very tough few years after reverting back to their Drachma, imo.


1944: Ratio of old Drachma to new Drachma 50,000,000,000 to 1

1954: Revaluation of Drachma 1000 to 1

Fri, 01/13/2012 - 00:01 | 2060606 Nassim
Nassim's picture

I lived in Greece as a kid - 1963 to 1965. I also visited it many times as a student and later on. I remember the drachma being 80 to the pound sterling. I once ended up in Mykanos sharing an apartment with 4 Greek ladies from Athens. Had a great time but could not understand why there were so many gays - it was illegal in those days.

Fri, 01/13/2012 - 00:58 | 2060705 Freddie
Freddie's picture

Most of the Greeks want to stay in the euro because they do not want to take the devaluation.  Pensioners want to get paid in Euros.  The Greek politicians and their pals stole most of the money dumped on greece by the corrupt EU.  Just the same politicians and unionized govt workers throughout the west with the bankers looting the taxpayers.

Thu, 01/12/2012 - 14:32 | 2059044 Eally Ucked
Eally Ucked's picture

And what you want to put in? Another piece of Amrerican useless money? 

Thu, 01/12/2012 - 14:12 | 2058960 Cognitive Dissonance
Cognitive Dissonance's picture

I have first dibs on one of the smaller islands when they go up for aution. In fact, who wants to form a cartel with me and corner the Greek Isles market? :>) 

Thu, 01/12/2012 - 14:15 | 2058973 Cdad
Cdad's picture

Count me in.

Thu, 01/12/2012 - 14:17 | 2058978 GeneMarchbanks
GeneMarchbanks's picture

Kos? Crete?

Thu, 01/12/2012 - 14:49 | 2059113 The Count
The Count's picture

Mykonos baby, and I am not even gay.

Thu, 01/12/2012 - 14:56 | 2059139 blu
blu's picture

Are you sure?  ;)

Thu, 01/12/2012 - 14:58 | 2059151 The Count
The Count's picture

yeah, I'm sure, first went there in the early 70s. those were the days my friends.... 

Thu, 01/12/2012 - 14:25 | 2059008 The Deleuzian
The Deleuzian's picture

You'll have to talk to Poseidon first...Oh I'm sorry CogDis...I didn't see your Avatar...SIR!!!

Thu, 01/12/2012 - 14:34 | 2059056 Eally Ucked
Eally Ucked's picture

Do you have real money or just USD?

Thu, 01/12/2012 - 14:41 | 2059091 QuietCorday
QuietCorday's picture

Can I have first dibs on Folegandros?

Thu, 01/12/2012 - 14:12 | 2058961 GeneMarchbanks
GeneMarchbanks's picture

I'm a drachmillionaire!

Thu, 01/12/2012 - 14:19 | 2058987 blu
blu's picture

5X devaluation is ruinous. I have a sinking feeling that when the Greeks wake up and realize that they are not getting back the 350Drachma/Euro they paid on entering the monetary union, they are going to go completely ape shit. They'll want to know who walked away with 80% of their nations treasury.

And I'm not sure it was any Greeks who got it.

Thu, 01/12/2012 - 14:40 | 2059066 bahaar
bahaar's picture

On the contrary, 5x devaluation may be the charm.  I remember Indian rupee devalued 5 times in 1990.  And look at India today.  Default/Devaluation may cause lot of pain but Greece will become more competitive and their economy will start to mend.

Thu, 01/12/2012 - 14:53 | 2059112 blu
blu's picture

India rode a huge wave of value exports from the US, as they picked up lucrative outsourcing contracts. I know because I was in the middle of it. The amount of money in motion was staggering.

That particular bonanza is about played out now. Nor will there be another, not from the US; "outsourcing" is about to become a campaign issue, and not in a good way either.

Don't know if the Greek economy will look attractive enough at 5X compression, given their systemic problems. Do they have a viable manufacturing base? Large population of English speakers? Copious natural resources? No? Okay then good luck digging out of that particular hole.

Thu, 01/12/2012 - 15:06 | 2059195 CuriousPasserby
CuriousPasserby's picture

Beaches, gyros, wine! Too bad the women are so swarthy, though.

Fri, 01/13/2012 - 00:02 | 2060607 Nassim
Nassim's picture

True about the women. It is one of the few place I know of where the men look better than the women. :)

Fri, 01/13/2012 - 01:01 | 2060707 Freddie
Freddie's picture

Man - you can go from one end of Europe to another. Eastern, Western, North and most of the South - you can find pretty women all over.  Then there is Greece.

Thu, 01/12/2012 - 14:50 | 2059118 flattrader
flattrader's picture

Apeshit is closer than you think...


Children 'dumped in streets by Greek parents who can't afford to look after them any more'
  • Youngsters abandoned as parents struggle
  • 4-year-old found clutching note: 'I can't afford her'
  • Country also running out of medicine
  • Aspirin stocks low as austerity measures bite

By Lee Moran Last updated at 7:05 PM on 11th January 2012

Mothers dumping children with notes of apology attached.

When they can get over their shame, it will come unglued for real.



Thu, 01/12/2012 - 16:25 | 2059580 ZeroPower
ZeroPower's picture

I think the media is looking for anomalies in these Greek stories... All said and done, US has some shitty conditions too in the major urban centers with people living way under the poverty line. I find it hard to fathom a loving mother leaving her kid on the street. Did GRE already become a 3rd world country? 

Thu, 01/12/2012 - 19:58 | 2060192 YHC-FTSE
YHC-FTSE's picture

At least they don't shoot their kids:


Texas mom denied food stamps shoots kids and kills self


Starting to get crazy out there.

Thu, 01/12/2012 - 20:33 | 2060239 smiler03
smiler03's picture

Truly dreadful things happening in Greece. From 19th December http://tiny.cc/9gkqq

  • One Greek in four says that their money will not cover the purchase of basic food items
  • One citizen in four lives under the poverty line
  • Over 400,000 households are without any income as none of their components is in work
  • Two out of four have to draw on their savings in order to survive
  • 60,000 households are applying to courts to have themselves declared bankrupt 
  • Children have fainted during school lessons as they were undernourished
  • A father committed suicide as he was no longer able to care for his three young children
  • Nine Greeks out of ten have cancelled all expenditure on clothing and footwear
  • Only one in four is trying to save money in view of the uncertain economic outlook
Thu, 01/12/2012 - 14:13 | 2058963 blu
blu's picture

Four. Hundred. Percent.

Say that to yourself slowly a couple times.

Yeah. Creepy.

Thu, 01/12/2012 - 14:16 | 2058975 Cdad
Cdad's picture

And our market masters continue to suggest that central bank intervention shall fix all.  Apparently, the market is as meaningless as it is dysfunctional.


Thu, 01/12/2012 - 14:32 | 2059046 end da fed
end da fed's picture

im fairly new here so bare with me while i ask what is probably obvious to the rest of you... 400%? what does that mean?

Thu, 01/12/2012 - 14:43 | 2059103 blu
blu's picture

At the simplest I suppose it means that the Greek government promises to pay you $4 to borrow $1 from you, for a year.

The expectation on the street is that they won't pay you back anything, not the $4 nor the original $1, and bond buyers can go pound sand. So the yield is actually meaningless as it is unlikely anyone is taking the bait.

If it means anything, it means that the Greek bond market is toast. And as goes bonds, so goes the government. Is the best guess.

Thu, 01/12/2012 - 15:10 | 2059214 end da fed
end da fed's picture

thanks. that's what i thought, but it's so ridiculous, i figured i had to be wrong.

Thu, 01/12/2012 - 16:11 | 2059510 FrozenOut
FrozenOut's picture


{1 + yield(Greece)} x (expected recovery rate) = 1 + yield(Germany) ~= 1

So approximately... (expected recovery rate) = 1 / {1 + yield(Greece)} = 1/5

Implies 80% loss of principal (Greece defaults but stays in Euro, or Greece honours debts in "new Drachma" at 5:1 devaluation)

Thu, 01/12/2012 - 16:14 | 2059521 end da fed
end da fed's picture

how do CDS figure into this?

Thu, 01/12/2012 - 16:40 | 2059670 FrozenOut
FrozenOut's picture

expected recovery rate is weighting across all bond holders. Those with CDS, if the CDS actually pay out, lose nothing. So implied recovery rate for the uninsured is actually lower.

Thu, 01/12/2012 - 14:20 | 2058979 fiddler_on_the_roof
fiddler_on_the_roof's picture

ZH has been going on and on about EURO - blah blah this, blah blah that. Where is EURO now, since 10 years - up nearly 50% against the dollar.

all these EURO trashing for past 2 years looks like pure bullshit.

Thu, 01/12/2012 - 14:32 | 2059041 Teamtc321
Teamtc321's picture

The ^ above ^ verbiage is a prime factual reason for the U.S. to return to Ron Paul's sound money principals imho.  

Ron Paul 2012

Thu, 01/12/2012 - 15:44 | 2059375 fiddler_on_the_roof
fiddler_on_the_roof's picture

We don't need Ron Paul's Hard Gold money. We don't need no F**king Govt to decide price of anything including Gold.

We just need to wait for paper Gold to crash while physical Gold becomes unavailable. Until then  just accumalate and wait for freegold.

Thu, 01/12/2012 - 14:49 | 2059116 Hansel
Hansel's picture

For the red arrow crew, the euro is still up against the dollar over its lifetime.

Thu, 01/12/2012 - 16:31 | 2059611 ZeroPower
ZeroPower's picture

If we're talking USD crosses, take a look at CAD, AUD, CHF, JPY. All up a lot more than EURUSD.

And i know ive missed some shitty less liquid curr too... but most are up against the dollar.

The correct question you should be asking is what the next 10 years will look like for the EUR.

Thu, 01/12/2012 - 15:09 | 2059207 crawldaddy
crawldaddy's picture

yeah exactly where Benny and the Fed want it to be. Banksters WANT and NEED to Dollar to be low.  Low currency wins in a world where everyone thinks exports is the only gdp game in town.

Thu, 01/12/2012 - 14:23 | 2058985 Eireann go Brach
Eireann go Brach's picture

There are many Irish from the Republic of Ireland taking their Euro's across the border into Northern Ireland and converting to British Pounds! Even through the din and mind fucking nonsensical noise of the X Factor and Dancing with the Imbeciles, the sheep are catching on!

Thu, 01/12/2012 - 14:30 | 2059034 Dick Darlington
Dick Darlington's picture

I'm glad to hear that. People there deserve better than the bank loving crony gubbmint and the new overlords from IMF/EU/ECB. What's a better way to "lift the middle finger" than to get out of the fake currency for good. If the gubbmint doesn't have the balls to do it then people just have to do it by themselves.

Thu, 01/12/2012 - 22:24 | 2060425 Vet4RonPaul
Vet4RonPaul's picture

I agree Dick; the Irish really got screwed when the EU made us bailout the banks.  Taxpayers got all the pain and no gain.

Thu, 01/12/2012 - 14:50 | 2059120 Rincewind
Rincewind's picture

Well, well, I applaud the Irish for exchanging the EUR. But change it to GBP???

Although the dollar is fucked, too, but I would still just go the bank and change into something else (may be AUD, CAD...).

Of course, for any sensible person, you would just exchange into PM, but I think the sheeple are not there yet.

Thu, 01/12/2012 - 14:28 | 2059022 Caviar Emptor
Caviar Emptor's picture

Just remember: he who defects and devalues first devalues best. 

Thu, 01/12/2012 - 14:51 | 2059122 Bonesetter Brown
Bonesetter Brown's picture


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