The arrangements for Greece’s return to the Drachma.

The following is presented in the Fullermoney newsletter as an academic appraisal of how the Eurozone might be downsized.

Essentially it outlines of how Greece’s imminent return to the Drachma should be handled.

It seems to be more than a theoretical plan, as the first bullet point seems to have already been put in place, because the second bullet point about printing new Drachma notes is, according to one report, already well under way.

This proposal is that the Drachma would begin as parity with the Euro, before finally setting at about 60% of its original value.

My interpretation of this, especially in view of the last bullet point, is that if you are a tourist try to avoid buying Greek Euro’s or Drachma until absolutely needed.

If you are a Greek, you’re not going to be allowed to take your cash out of the country and should turn your cash into Gold or some other commodity that will hold its value. In domestic terms its value, in Drachma, will shoot up.

The reason for avoiding panic is simply that someone has to lose out and the powers-that- be would rather it was you.

It will not be possible to be open about preparations to leave for more than a very short period of time without precipitating damaging outflows of money which could cause a banking collapse. Accordingly, preparations must be made in secret by a small group of officials and then acted on more or less straightaway.  

• Given the short time from announcement to implementation, it will not be possible to have new notes and coins available immediately when a country exits the euro. This is unfortunate, but it is not as serious as is often imagined. The authorities should allow euro notes and coins to continue to be used for small transactions. But straight after the decision to leave the euro has been announced, they should commission new notes and coins to be produced as soon as possible.  

• In order to facilitate the convenient use of euro notes and coins, to help to maintain price transparency and to boost confidence in the new regime, we recommend that the new currency, say the drachma, is introduced at parity with the euro. Accordingly, where a price used to be 1.35 euros, it would now be 1.35 drachmas. Of course, the drachma would be free to fall on the foreign exchange markets and indeed it is vital that it should do so.  

• We reckon that if any or all of the weaker members of the euro-zone left, their currencies would depreciate by something like 30-50%. This would probably add about 10% to consumer prices, which, spread over two years, would cause the annual rate of inflation to rise by roughly half this figure. But international experience suggests that such a spike can be short-lived and inflation can then return to something like its previous level.  

• Just before departure, some form of capital controls will be essential, including at least closure of the banks. But after departure, capital controls should be avoided and, if used, should be withdrawn as soon as possible.


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