Economy May 18, 2012
by R Jagannathan
Even as the emergency exit lights are flashing for Greece, here's the problem: there is no exit door.
It seems the European Union has all-or-nothing treaties: if you want to exit the euro, you have to exit the EU as well. A Wall Street Journal (WSJ) report quotes Austrian Finance Minister Maria Fekter as saying: "It's impossible to leave the euro zone - one can only leave the European Union."
So does this make a Greek exit more or less likely?
The answer, of course, is: no one knows. But that has not stopped experts from speculating about how Greece can exit the euro. An exit could be preceded by a loan default or a formal repudiation of euro debt, but the mechanics of it are fairly clear: exit means replacing the euros Greeks own with drachmas, the old Greek currency in new form.
The Wall Street Journal and Britain's The Telegraph have given their own versions of how this could happen - assuming the Greeks decided to take a plunge into the unknown - and they both agree that it would have to be done over a weekend, preferably a long one.
Weekends are not going to be fun for the world's bankers anymore.
The Telegraph says it could happen thus: "The most likely scenario would involve the Greek authorities privately agreeing a date with the rest of the eurozone, the European Central Bank, and the International Monetary Fund, to formally exit. They may decide to announce the decision after the markets have closed, possibly on a Friday evening, to give investors a chance to digest the news."
And after that? Greek-owned euros would get replaced with drachmas, existing euros in Greek hands would get stamped as drachma at your nearest bank while new currency is printed. Assuming the initial plan is to issue one drachma against each euro, on the first day of trading the drachma would crash - giving Greek's creditors a rude shock and Greek industry a huge competitive advantage to export to the European Union.
The Wall Street Journal's rendition of an Greek euro exit runs thus: declare a bank holiday, shut down all ATMs and banks for a few days to stop euros oozing out of the country, convert all euro-denominated accounts to drachma, encourage the population to use credit cards while new currency is being printed, and once that is done, allow it to float against euro and other currencies.
The Greeks are already feverishly spiriting euros out of Greece for the simple reason that a euro held outside Greece will be worth more than a euro held inside, which will become a drachma once the country exits the eurozone.
Both The Telegraph and WSJ versions are clear that it will have to be done over a long weekend. So please mark your calendars for any long weekends over the next two months and watch out, and especially after the next Greek elections due on 17 June.
If the Left makes huge gains in the Greek elections, exit could become a reality.