Running Through Unilateral Greek Exit Scenarios

Includes: FXE
by: Edward Harrison

I wrote this outline for Italy in November before the ECB’s Italian job. I didn’t and still don’t see an Italian exit or default as a baseline. However, a Greek exit for the eurozone has been my baseline for a number of months. Citigroup’s Willem Buiter has talked a lot about this recently. He and his colleagues call it "Grexit". Business Insider’s Simone Foxman has a good synopsis of that view.

Here’s how I see it happening, based on my Italian default post.

  1. Plan. The Greek government can plan for a redenomination into New Drachma in secret that takes advantage of the Greek law jurisdiction over their sovereign debt obligations.
  2. Law. “Euroization” would remain in place and the euro would continue as the currency of physical payment. However, New Drachma would become the national currency, pegged at 340.75, exactly the same rate as the Drachma was fixed on 19 June 2000 and converted into euros on 1 January 2002. All debt under Greek law would be redenominated into New Drachma at the 340.75 New Drachma exchange rate peg. This would effectively bring us back to 31 December 2001 for Greece.
  3. Taxes. The government would announce that henceforth it will tax exclusively in New Drachma. All municipal governments would be required by law to tax in New Drachma.
  4. Banks. Like the Argentines before them, the Greek government would convert all euro bank accounts legally into New Drachma. The systems would process as if it were euros because of the fixed peg, but legally the money would be New Drachma. This would make the Greek economy “euroized” but make the banking system redenominated into New Drachma.
  5. Retail. Retailers, all sellers of Greek goods, would then be forced to return to the double accounting treatment of pre-2002 whereby they denominate all transactions in both Drachma and Euros. Again, the paper money would be euros and each euro would initially be worth 340.75 New Drachma. The electronic money would legally be New Drachma, even while the systems said euro.
  6. Float. On day one, immediately after redominating, the Greek government would drop the 340.75 New Drachma exchange rate peg and float the new Drachma as a freely floating currency. From that day forward, foreign currency adjustments would need to be made between euro and New Drachma.
  7. Physical currency. New Drachma would be printed by the Bank of Greece and introduced to replace euros.

When the present government loses re-election in a few months, the new government will have difficult decisions to make. One of these will be whether to rescind the austerity deal now being hammered out. If they do not accept the deal, Greece must then exit the euro zone.