What happens if Greece leaves the Euro?

[investor-man]

I'm curious what the mechanics would be behind Greece leaving the Euro? Do they force banks to convert all Euro deposits to Drachma using some conversion factor, like 2 Drachma for every 1 Euro? And force the banks to only accept deposits in Drachma or automatically convert them over a grace period?

 

And then what does the government do about its expenses. If they've left the Euro it would be safe to assume they don't have enough money to cover their costs, so would they simply print money to cover costs and rely on lag time between quantity of money and price inflation?

 

How long does it take to print up enough Drachma to cover cash needs?

 

Anybody have any quick reads on similar situations in history? Anybody seen any good articles discussing such a move?

 

Thanks!

[randomep]

I'm curious what the mechanics would be behind Greece leaving the Euro? Do they force banks to convert all Euro deposits to Drachma using some conversion factor, like 2 Drachma for every 1 Euro? And force the banks to only accept deposits in Drachma or automatically convert them over a grace period?

 

And then what does the government do about its expenses. If they've left the Euro it would be safe to assume they don't have enough money to cover their costs, so would they simply print money to cover costs and rely on lag time between quantity of money and price inflation?

 

How long does it take to print up enough Drachma to cover cash needs?

 

Anybody have any quick reads on similar situations in history? Anybody seen any good articles discussing such a move?

 

Thanks!

 

That's exactly what I was wondering. And I have scoured all over for sources but could find none. I did ask a coworker who had a mortgage on a property in france in the 90's. I live in US. He did say that his contract was written in both francs and euros. So it say this much is your debt in francs and in euros. He used to pay that in francs and then in euros after the switch.

 

So I don't know the answer to your question but I think it is best to understand the situation in the 90's when they switched into euros first. Anyway does anyone have any anecdotal experiences? Please share.

 

 

[Jurgis]

So I don't know the answer to your question but I think it is best to understand the situation in the 90's when they switched into euros first.

 

I rather violently disagree. Frank(lira/deutchmark/etc.) conversion to euros was orderly conversion where nobody expected the converted value to drop through the floor. This is completely not applicable to grexit.

 

If they grexit, of course there will be bank runs. So they have to prepare beforehand without everyone knowing and without tipping their hand. This is almost impossible... On any rumor they'd have a bank run anyway.

 

If you had deposits in euros as a person or a business, would you agree to get your money back in worthless drachmas?

 

The better example would be some LatAm countries that had a peg to dollar (Ecuador? Peru? I can't remember offhand) and then broke it. But even that is not a real comparison, since you had money in local currency and you kinda knew the risk that it would unpeg. E.g. Lithuanian litas was pegged to Euro and you could get very high yields in 2009 in banks since there was a rumor/risk of unpegging - so banks had to pay high yields on litas so that people would not convert to euros (which was the strong currency in this example).

 

In Greek case, people/businesses have money in euros and if they only move it to German bank NOW, they have it in euros forever. So how can government turn this into drachmas without huge blowup?

[Eye4Valu]

Bad things...in more places than just Greece, although it would bear the brunt of it. Outcomes can't accurately be predicted in advance. If I had to guess, there would be an immediate and drastic devaluation in currency, together with even more severe lack of access to markets, capital and otherwise. A depression in essence. 

[Jurgis]

Bad things...in more places than just Greece, although it would bear the brunt of it. Outcomes can't accurately be predicted in advance. If I had to guess, there would be an immediate and drastic devaluation in currency, together with even more severe lack of access to markets, capital and otherwise. A depression in essence. 

 

Yeah, but that's afterwards. I believe investor-man is asking how the heck they do it all. And it's not clear.

 

I think is one reason some people talk about DeutcheMark exit - this is easy: Germans print DMs, they exit at 1:1, DMs immediately go up, voila. They could even freeze euro inflows so that speculators won't flood their banks with expectation of higher DM. Still much easier than Grexit. :)

[randomep]

So I don't know the answer to your question but I think it is best to understand the situation in the 90's when they switched into euros first.

 

I rather violently disagree. Frank(lira/deutchmark/etc.) conversion to euros was orderly conversion where nobody expected the converted value to drop through the floor. This is completely not applicable to grexit.

 

 

That may be so..... but I'd still like to know, I just asked anyone who was around with money at that time to describe the financial mechanics. if comparing them is like comparing apples to oranges then I wont compare the two, just want to how the historical context.....

[morningstar]

So I don't know the answer to your question but I think it is best to understand the situation in the 90's when they switched into euros first.

 

I rather violently disagree. Frank(lira/deutchmark/etc.) conversion to euros was orderly conversion where nobody expected the converted value to drop through the floor. This is completely not applicable to grexit.

 

If they grexit, of course there will be bank runs. So they have to prepare beforehand without everyone knowing and without tipping their hand. This is almost impossible... On any rumor they'd have a bank run anyway.

 

If you had deposits in euros as a person or a business, would you agree to get your money back in worthless drachmas?

 

The better example would be some LatAm countries that had a peg to dollar (Ecuador? Peru? I can't remember offhand) and then broke it. But even that is not a real comparison, since you had money in local currency and you kinda knew the risk that it would unpeg. E.g. Lithuanian litas was pegged to Euro and you could get very high yields in 2009 in banks since there was a rumor/risk of unpegging - so banks had to pay high yields on litas so that people would not convert to euros (which was the strong currency in this example).

 

In Greek case, people/businesses have money in euros and if they only move it to German bank NOW, they have it in euros forever. So how can government turn this into drachmas without huge blowup?

 

Presumably it happens over a weekend and then, if your deposits are in the bank, they've already turned into new drachmas. If you have cash, you're barred from leaving the country with it and its forcibly converted at any border point. There are only 2 ways for money to leave a country - through the banking system or physically over the border - and the government is probably pretty experienced at controlling both.

 

Your last point I think is already happening - people in Greece are well aware of this and deposit flight, though intermittent, has been happening since 2009, accelerating during periods of stress.

[investor-man]

After some thought, maybe I'm too pessimistic with my assumption that they will not be able to cover the costs of running the government. Last year they had a slight surplus. If they write off their debts they will probably be able to cover their own expenses with taxes. They can probably do a 1:1 Euro to Drachma conversion at the banks, and if they can show they won't budge the money supply, the currency ought to maintain parity. This is only if they can cover their own obligations. If they can't, then I'd expect the doomsday scenario described in some of the posts above.

[randomep]

After some thought, maybe I'm too pessimistic with my assumption that they will not be able to cover the costs of running the government. Last year they had a slight surplus. If they write off their debts they will probably be able to cover their own expenses with taxes. They can probably do a 1:1 Euro to Drachma conversion at the banks, and if they can show they won't budge the money supply, the currency ought to maintain parity. This is only if they can cover their own obligations. If they can't, then I'd expect the doomsday scenario described in some of the posts above.

 

How can the country function exactly? They run a 10% trade deficit, if they print drachmas and abandon the euro and renege on their debts, then the drachma will drop like a stone outside Greece. And you have doomsday.

[Jurgis]

So I don't know the answer to your question but I think it is best to understand the situation in the 90's when they switched into euros first.

 

I rather violently disagree. Frank(lira/deutchmark/etc.) conversion to euros was orderly conversion where nobody expected the converted value to drop through the floor. This is completely not applicable to grexit.

 

 

That may be so..... but I'd still like to know, I just asked anyone who was around with money at that time to describe the financial mechanics. if comparing them is like comparing apples to oranges then I wont compare the two, just want to how the historical context.....

 

If you want to compare apples to oranges... OK, so I know about 2.5mln people who just converted from Litas to Euro in Lithuania. What exactly you want to know???  ;D

 

Edit: note that litas was pegged to Euro before the conversion. If you want unpegged conversion, hmm, I don't know if any country did unpegged conversion to Euro. I think they all pegged before converting.

[Jurgis]

Presumably it happens over a weekend and then,

 

You can't print a country-size amount of money over a weekend. Once you start printing, you have bank runs since this is impossible to hold in a secret.

 

Edit: I guess one possibility is to lock the capital exits via electronic route, lock withdrawals to small amounts and then announce drachma in a week or two it takes to print. This might work somewhat like Cyprus.

[writser]

A tangential question I've been pondering: would a Greek default necessarily mean that Greece has to to leave the euro zone?

[randomep]

So I don't know the answer to your question but I think it is best to understand the situation in the 90's when they switched into euros first.

 

I rather violently disagree. Frank(lira/deutchmark/etc.) conversion to euros was orderly conversion where nobody expected the converted value to drop through the floor. This is completely not applicable to grexit.

 

 

That may be so..... but I'd still like to know, I just asked anyone who was around with money at that time to describe the financial mechanics. if comparing them is like comparing apples to oranges then I wont compare the two, just want to how the historical context.....

 

If you want to compare apples to oranges... OK, so I know about 2.5mln people who just converted from Litas to Euro in Lithuania. What exactly you want to know???  ;D

 

Edit: note that litas was pegged to Euro before the conversion. If you want unpegged conversion, hmm, I don't know if any country did unpegged conversion to Euro. I think they all pegged before converting.

 

That's one question. But ya I guess first step to joining is always peg the local currency.  So effectively the European Central bank is offering to convert all of the local currency to euros? Now that I think of it ya it is very straight forward compared to the reverse direction!

 

Last question: how do you know 2.5mln people :)

 

[randomep]

A tangential question I've been pondering: would a Greek default necessarily mean that Greece has to to leave the euro zone?

 

NO there are many articles about that. In fact I read the present Greek finance minister 3yrs ago said something to the effect we'll just default and stick it to Germany and stay in the union.....

 

There is no legal framework for seceeding from the eurozone just like there was no way to leave the union in 1860, funny you'd think they would've thought of that......

 

 

[Jurgis]

Last question: how do you know 2.5mln people :)

 

We are all related.  ;)

[scorpioncapital]

The UK is part of the Euro and uses it's own currency, so I don't think an exit is mandatory. However, whether the other countries want to keep a country "in" that does not even remotely meet any of their metrics is another story.

[randomep]

The UK is part of the Euro and uses it's own currency, so I don't think an exit is mandatory. However, whether the other countries want to keep a country "in" that does not even remotely meet any of their metrics is another story.

 

I think the original poster was asking if defaulting automatically means Greece is disqualified from using euro as its currency.

[writser]

Correct. A lot of people seem to implicitly assume that "Greek default" equals "Grexit" and I think that that is not the case. An alternative scenario is that Greece is allowed to stay in the union but has to give up its fiscal autonomy or something along those lines. This would cause less panic in the short run and is therefore maybe more palatable to politicians on both sides. I think this scenario should be discussed before theorizing about how many days it would take to print enough Drachme's.

[Jurgis]

Correct. A lot of people seem to implicitly assume that "Greek default" equals "Grexit" and I think that that is not the case. An alternative scenario is that Greece is allowed to stay in the union but has to give up its fiscal autonomy or something along those lines. This would cause less panic in the short run and is therefore maybe more palatable to politicians on both sides. I think this scenario should be discussed before theorizing about how many days it would take to print enough Drachme's.

 

I was answering the exact question about Grexit. I was not talking about whether Grexit is likely or not and whether Greece will default and whether that will lead to Grexit.  8) These are quite different questions from what the original poster asked.

 

Have fun.

[investor-man]

The intent of this thread is to figure out the pure mechanics of Greece leaving the Euro currency, not to ponder if it will happen. The reason I'd like to know about the pure mechanics are the banks are looking very cheap, and I want to know how the conversion will happen, so that I can start to understand how a bank run can be avoided, supposing they leave the currency. Also, I like the looks of Autohellas, which I think will remain a successful business regardless of what happens, but if high inflation ensues, it probably makes sense to wait on that one until some sort of critical mass of hysteria. If the mechanics of leaving the euro is straight forward, that moment may be now, but if not, then that moment could be 6 months from now.

[Jurgis]

So my latest answer is: lock capital exits via electronic route, lock cash withdrawals to small amounts and then announce drachma in a week or two it takes to print. This could work though you still have huge lockup in businesses who can't pay anyone outside the country and vice versa. And there's still potential for major social unrest. But I believe similar things have been done though not exactly in this context. See Cyprus - apples-and-oranges, but somewhat similar oranges. :)

 

There are still questions of what exactly happens with Euros in Greek banks. They don't just disappear when depositors get their drachmas. Who owns them on conversion? Greek central bank? I guess. This might affect your investment into Greek banks.

 

Pretty clearly any loans from foreign parties are either defaulted or have to be paid back in Euros. Nobody will take drachmas 1:1. Some loans might be renegotiated, but overall if person/business has euro deposits turned into drachmas while loans are outside of Greece, they are screwed. If loans are inside Greece, government may turn them into drachma loans.

 

There might be questions of legality of all of this, but that's potentially where Greek sovereignty trumps legalese. Sure, this might force Greece out of EU (which is different from Euro, but some people confuse the two...), so that's another risk.

[writser]

The intent of this thread is to figure out the pure mechanics of Greece leaving the Euro currency, not to ponder if it will happen. The reason I'd like to know about the pure mechanics are the banks are looking very cheap, and I want to know how the conversion will happen, so that I can start to understand how a bank run can be avoided, supposing they leave the currency. Also, I like the looks of Autohellas, which I think will remain a successful business regardless of what happens, but if high inflation ensues, it probably makes sense to wait on that one until some sort of critical mass of hysteria. If the mechanics of leaving the euro is straight forward, that moment may be now, but if not, then that moment could be 6 months from now.

 

Especially if you want to value a company given multiple scenario's I would start with estimating probabilities. If you think that the chances of Greece recovering are 80% and your expected return in that case is 300% you can pretty much skip modelling all other outcomes because they are irrelevant to your investment decision.

 

To me it looks like you start with the nitty gritty details of an extremely complicated scenario that is basically impossible to value and as fas as I can see you haven't even determined whether it is is relevant or not. Why not just say 'in case of a bank run I am probably fucked and lose 70% of my initial investment' and start from there? If you investment decision hinges on the specific mechanics of a currency conversion you should probably not buy into it anyway.

 

That said, bank runs are interesting so by all means continue the discussion.

[Jurgis]

I'll partially +1 to what writser said.

[Guest Schwab711]

The intent of this thread is to figure out the pure mechanics of Greece leaving the Euro currency, not to ponder if it will happen. The reason I'd like to know about the pure mechanics are the banks are looking very cheap, and I want to know how the conversion will happen, so that I can start to understand how a bank run can be avoided, supposing they leave the currency. Also, I like the looks of Autohellas, which I think will remain a successful business regardless of what happens, but if high inflation ensues, it probably makes sense to wait on that one until some sort of critical mass of hysteria. If the mechanics of leaving the euro is straight forward, that moment may be now, but if not, then that moment could be 6 months from now.

 

Especially if you want to value a company given multiple scenario's I would start with estimating probabilities. If you think that the chances of Greece recovering are 80% and your expected return in that case is 300% you can pretty much skip modelling all other outcomes because they are irrelevant to your investment decision.

 

To me it looks like you start with the nitty gritty details of an extremely complicated scenario that is basically impossible to value and as fas as I can see you haven't even determined whether it is is relevant or not. Why not just say 'in case of a bank run I am probably fucked and lose 70% of my initial investment' and start from there? If you investment decision hinges on the specific mechanics of a currency conversion you should probably not buy into it anyway.

 

That said, bank runs are interesting so by all means continue the discussion.

 

Although you probably just threw it out there writser, that 70% principal loss is probably not far off. It's pretty close to 1/GDP% which I think is a reasonable approximation of potential damage for sovereigns and pretty close to the losses for Argentina. Russia was kind of a different default because they had assets but I suspect Greece will be closer to Argentina/African countries. The Euro issue is complicated for sure. I have no clue here where to begin. Maybe be worth reading about the specifics of the deutsche mark.

[randomep]

 

 

OK one mechanics questions. In the event of a Grexit would Greece simply say that a euro is worth N Drachmas on day of exit and convert all their sovergn debts to Drachmas in the same ratio? If so that would be ugly....