Tuesday, July 7, 2015

Planning for the Grexit

There is no doubt to my mind that right now the Syriza government should be frantically planning for the Grexit.  There is no doubt to my mind that the Syriza government should have been doing just that from the first it was inaugurated.  And, as someone (I forget who and certainly could not find the link) commented that if Syriza has been making any such plans, they have been hiding them well.

That is somewhat a different story.  While I believe Syriza should have been making such plans, it should also be keeping them as secret as possible.  This post, though speaking of FDR, explains the problem very well.  Any time a government is planning a devaluation, it must lie about it until the very last minute because as soon as a government says that it plans to devalue, there is immediate flight from the currency forcing an immediate devaluation.  And anytime people thing a government might devalue, it leads to bank runs, currency hoarding and -- well, see what has been happening in Greece in the past week.  In the interregnum between Hoover and Roosevelt, it went on for months. The author has a fascinating post about the fear and damage the economy suffered at the mere thought that Roosevelt might devalue -- as opposed to the immediate, immense benefit it reaped when he actually did devalue.

In the US, when there was fear that Roosevelt would devalue the dollar against gold, there was a stampede to convert dollars into gold.  This meant taking dollars out of banks and out of circulation, which led to mass credit freeze and bank runs.  Even people who were not thinking of converting their dollars into gold wanted to get them out of banks once the banks started to look shaky. Likewise, in Greece, fear that the government will introduce a new currency, which everyone agrees will fall fast, is making people want to take their euros out of the bank and hoard them.  Even people who aren't thinking of hoarding euros don't want to leave their money in a shaky bank.

But there are at least two critical differences between the US in 1933 and Greece today.  First, the US was a large enough country to be largely self-contained and have very little foreign debt, and besides, it was a creditor.  This meant that a devaluation would not have the catastrophic result that it has had in other countries, a skyrocketing of foreign debts.  And, surprisingly, Greece is apparently a net creditor in private finance, i.e., its investments abroad in private hands exceed its private foreign debts.  But both amounts are much larger in Greece today than they were in the US in 1933, so no one doubts that devaluation would be much more traumatic.

The other, huge, difference was that in 1933, US dollars, in paper, did physically exist.  To devalue did not change the currency that normally changed hands; it simply meant that currency could be exchanged for less gold than in the past.  In Greece, by contrast, drachmas have no physical existence and will have to be re-started.  This will take time, and given all that has been said about speed being of the essence, that is a serious problem.

This article is the best account I have seen yet on how to reintroduce the drachma.  It recommends legislation converting all financial assets and liabilities and all contracts from euros into drachmas at a rate of one to one.  (The drachma will then fall in international trade, but there will be no need to modify domestic contracts).  Banks will have to close for a few days to reprogram their systems. After that electronic transactions in drachmas would be possible until the physical drachma is introduced, which could take months.  It would be inconvenient but more annoying that anything for people with bank accounts and electronic transfer cards.  For people without banks or cards, it could be devastating.  Such people are most common in the informal sector.  In hard economic times, the informal sector grows.  And the line between the poorest members of the formal sector and the informal sector can be hazy.  A lot of the poorest members of the formal sector don't have bank accounts and deal in cash.  (Trust me, I know whereof I speak).  There would be other problems with skyrocketing foreign debt and bankruptcies and controlling inflation, but these problems would be the same in any devaluation.  It is creating a new currency where none existed before that makes the Grexit such a challenge.

The article convinces me that the transition is doable, and greatly facilitated by the use electronic transfers as money.  But the transition will require skill and competence.  Syriza does not impress the author with either.  Or me either.

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