9 May 2012
Far-right group Golden Dawn celebrate after joining parliament, and they are not pro-European
Greece crisis
http://www.bbc.co.uk/news/business-15575751
A
"drachma" is an ancient Greek currency unit and translates as a
"handful", which is a lot less than what Greece will need to pay off all
its debts.
For two years, everyone has been asking what would happen if Greece left the euro and went back to the drachma.
Now that time may be upon us.
With Greece unable to devalue its currency, the country is hobbled with crippling debt payments it cannot afford.
Even though it has cut its debt in half, Greece has been
subject to much social unrest as five years of recession and
bailout-imposed spending cuts have bitten hard.
Last week, a majority of Greeks voted for parties that want
to rip up the country's bailout agreement with the European Union and
International Monetary Fund (IMF) - including neo-Nazis.
The biggest winner was the leftist anti-bailout coalition,
Syriza, whose share of the vote more than tripled and who describe the
austerity imposed by the bailout as "barbaric".
Syriza is among those holding talks about forming a
government, one that rejects policies of austerity, and if it comes to
pass, a Syriza-led government will definitely not adhere to the terms of
the bailout.
So how would Greece leave the euro?
No big announcement
In reality, the new prime minister probably will not announce
it on TV one day, between broadcasts of the lottery and the football.
Continue reading the main story
Radio 4's Analysis runs through some of the scenarios of what
may happen if the eurozone were to split - and, crucially, what would
happen next.
Find out more
The new government will want to
renegotiate some parts of the bailout, but if that doesn't happen, then
Greece could simply stop paying its debt.
That would be a euro default.
Actually, a second, as Greece technically defaulted on its
debts when it renegotiated a 50% write-off of its debts with its
creditors earlier this year.
And that would put the ball back in Brussels' court - do the other 16 nations want a defaulter in the euro?
Last year, the French leader Nicolas Sarkozy told the Greeks: "Abide by the eurozone rules or leave."
Since then, Mr Sarkozy has himself been shown the door.
Still, one major issue is that there simply is no mechanism to leave the euro.
It was never envisaged by the bright-eyed politicians who created the impetus for the currency, which debuted in 1999.
"The treaty doesn't foresee an exit from the eurozone without exiting the EU," the European Commission has said.
This is the Maastricht Treaty from 1992, which led to the creation of the euro.
The option of leaving the EU was only added in Article 50 of the Lisbon Treaty in 2007.
So under its current obligations, for Greece to exit the euro or be thrown out, it would have to leave the EU.
Leaving is straightforward: it involves a member state
notifying the European Council - that is, the leaders of EU countries -
that it wants to go.
The Council then agrees the terms of the exit via a qualified majority.
Would leaving the EU be the end of the world for Greece? Probably not.
The key part of Article 50 involves "setting out the
arrangements for its withdrawal, taking account of the framework for its
future relationship with the Union".
Iceland, Liechtenstein and Norway all do fine and they are
not in the EU. They are part of the European Economic Area, meaning they
get access to the single market.
Switzerland is not even a member of the EEA and it trades with the EU with few problems - the odd tax dispute aside.
But again, the chaos of going from inside the EU to a country
outside of it, but still slap bang in the centre of Europe, could
possibly be even worse than what it is going through right now.
Peter Dixon, an economist at Commerzbank, says: "What happens then is that the cure ends up being worse than the disease."
New old currency
Regardless of whether Greece leaves or is thrown out, it will
be in the "nuclear option" phase, involving the introduction of a new
currency - the new drachma.
Europe's Choice
BBC correspondent Allan Little charts the key moments and issues that brought the EU to the current crisis.
It would not be easy to make a
new currency either, according to UK-based firm De La Rue, which prints
everything from the UK's sterling to the newest version of the currency
in Iraq, the dinar.
So how long does it take to plan and introduce new notes and coins?
"I don't think you could do it much faster than four months," Mark Crickett, one of De La Rue's consultants, told BBC Radio 4 Analysis' Chris Bowlby.
There would probably be an interim period - those four months - during which a temporary national currency would be used.
And you would sit back and let supply and demand do what it does. In this case, probably more supply than demand.
"The new currency would fall through the floor and inflation would go through the roof," Mr Dixon says.
It would be a legal minefield, as basic financial
transactions such as mortgages would have to be redenominated. But that
would not be the end of it.
"Living standards would be hit hard. It might seem like an attractive option, but the short-term costs are massive."
Wouldn't banks - who have already agreed to take a "haircut" of 70% - just accept the devalued new drachma-denominated debt?
"Well, no, because it may well halve in value again," Mr Dixon says.
The assets of banks inside Greece and those outside holding
Greek debt would be devalued. And of course, they would not be able to
borrow commercially.
Greece would probably have to impose capital controls to
prevent all the money leaving, much as Malaysia did in 1998 after the
Asian financial crisis.
So in the best-case scenario, Greece would have no buying
power, everything would be extremely expensive and it would also be
broke.
Lessons of the past
But the idea is that, with its currency so weak, Greece's economy would grow rapidly.
People often use Argentina as a comparison of such an
outcome, which Nobel-prize winning economist Paul Krugman has said is
"an imperfect parallel".
Argentina, which had its peso linked to the US dollar, defaulted on $102bn of debt during a financial crisis in 2001-02.
In 2005, the country persuaded 76% of creditors to accept a
debt swap that reduced the value of their bond holdings by nearly
two-thirds.
But Argentina had to go through years of pain, and at least
had the advantage of its own currency. The mechanics of de-pegging were
easier. And it is still unable to borrow in the international debt
markets.
Greece has to start afresh.
One comparison is Iceland, which in 2008 had a run on its currency when its banks failed.
The Icelandic krona lost more than half its value in one summer. It quickly faced interest rates at 15% and inflation at 14%.
But Mr Dixon suggests the closest recent parallel to a euro exit might well be the splitting of Czechoslovakia.
In February 1993, the Czechoslovak koruna was split into the
Czech koruna and the Slovak koruna - at a par of one-to-one. (One
version no longer exists; Slovakia adopted the euro in 2009.)
But in that scenario, as with the replacing of all the major
currencies of Western Europe with the euro, people had time to adjust to
the concept of a new currency.
"You had a long period of time to get used to the single
currency," Mr Dixon says. "You're not going to to get it the other way
around."
And the question would then become whether a queue would form at the door to leave the EU.
Will there be more elections in the peripheries of the eurozone? Would we then get the new punt? The new escudo? The new peseta?
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