19th September 2011
According to the BBC, the International Monetary Fund (IMF) has told Greece it needs better tax collection and reforms, not higher taxes, to recover from its debt crisis. This warning – nothing new – comes as Greece prepares for further funding talks with the IMF, the European Central Bank (ECB) and the European Commission, designed to pave to the way for the next 8bn-euro (£7bn) slice of its EU-IMF loan. Greece needs this money by next month to avoid defaulting on its debt.
Somehow, Greece has to steer between the Scylla of massive reform and the Charybdis of exiting the Euro. It's not getting on too well with the devil of taxation and reform so what will happen if it is forced into the deep blue sea of euro exit? Will it be a tragedy worthy of Aeschylus or a comedy that could have come from Aristophanes? Or a mix of both?
History is not helpful. While there are many instances of currency changeovers, these almost always involve either totalitarian regimes or swapping money that's not worth the paper it's printed on for something with greater value – the replacement of Confederate dollars with US money at the end of the civil war in 1865, Hungary's new forint after its post second world war hyper-inflation, and East German marks for the Deutschmark on re-unification. Or indeed, the exchange of the old drachma for the euro.
Where is the historical instance of anyone exchanging a strong currency for one that will be weaker? For that is what will happen if the Greeks are asked to swap the euro for the New Drachma (ND). Other than nostalgics for the 2,500 year old currency, everyone will bet that while the ND starts at parity with the euro, it will be a long way south at the end of the first day's trading.
Outside of police states, all currency changeovers need planning and notice. But give the Greeks notice and they'll naturally get as many euros as they can out of the bank in cash – and for those obsessives who look at the country of origin on each euro note, they'll get them in a northern European version. There is already evidence of this – and of very wealthy Greeks (including those with mega-fortunes to hide from the tax authorities) piling into real estate and bank accounts in the rest of the eurozone.
The "flight risk" could be minimised if the decision was made suddenly – say at 18.00 hours to come into force at midnight or earlier.
Mindful Money blogger Shaun Richards, who talks regularly with Greek economists, is doubtful whether this – or even an overnight – conversion is feasible. He says deposit flight has already taken place – a self fulfilling reason for the weakness of many Greek banks.
He writes: "Overnight ? I doubt it unless you have pre-planned matters such as printing notes and making coins for the new drachma. How long would that take? The note printing would take at least a week or so and it would have to be kept top secret. Would that level of secrecy work in Greece? Coins would take even longer. Then the new money would have to be distributed including to cash machines and arrangements make for the exchange of euros for the new money."
As an unintended consequence, Shaun Richards says the Greek treasury and its national bank would gain from note production and issue thanks to the often forgotten concept of seigniorage. Seigniorage is derived from the difference between interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those notes. It's a convenient source of revenue for some governments. The US government, for instance, gains because high denomination dollar bills are used in areas of political and monetary instability.