By Vasillis Viliardos
This article is part 1 of a dialogue series between three economists addressing the consequences and implications of a possible Eurozone exit and return to the Drachma for Greece. The progression of articles illuminates multiple facets and perspectives on this issue via a dynamic discussion of differing opinions. The economists examine concerns such as inflation, devaluation, geopolitical risk, and Greece’s relationship with global markets.
We have written a lot regarding the issue of a possible return to our national currency, which was the second-ever reserve currency in the world, following that of China. Aside from this, we have also emphasized the fact that a national currency is closely tied into the national identity, culture, and flag of a Nation, and is therefore of utmost importance for its survival.
Furthermore, we have proven that it would have been possible for Greece to have returned to a national currency prior to the “debt haircut” (PSI) agreement, which we had described at the time as a “Pyrrhic Bankruptcy.” A return to our national currency likely would have taken place had the then-government been permitted to go ahead with a referendum. While this government unfortunately is the one which brought Greece under the control of the IMF, it had been entirely correct in pushing for a referendum.
The main rationale is that, at the time, Greece could have converted its debt—both public and private—into drachmas. It would then have been able to service these debts by printing inflationary currency, naturally with all of the dangers that this option would pose. In addition, Greece’s loans had not been placed under English legal jurisdiction, Greece’s public assets had not yet been collateralized, its banks had not yet gone bankrupt, while the country’s private sector had not yet become overburdened with debt. Naturally, these conditions have changed in the present time.
Unfortunately, we cannot go back to the past. However, the issue of a return to a national currency remains a topic of discussion for many Greeks. It would not be correct for anyone to make pre-determined assumptions about this issue, or to dogmatically maintain that a return to a national currency would not be a realistic option today. One must be open to all viewpoints with regard to this issue.
The euro will be unable to survive if the Eurozone, which has become a prison for its member-states, does not proceed with fiscal and political unification and does not unify its banking system.
This is particularly the case because the euro, following the global financial crisis of 2008, has been transformed into the currency of slave states. The euro will be unable to survive if the Eurozone, which has become a prison for its member-states, does not proceed with fiscal and political unification and does not unify its banking system. Greece may well be stuck, but there are other countries which are not, and for which a return to their national currencies may be a preferable option (Italy, France, etc.).
Such a scenario would obviously lead to the dissolution of the currency union—a possibility for which all countries, including Greece, must be prepared. Moreover, this may potentially be a secret goal of certain key members of the current government, as there cannot be a truly leftist government within the neoliberal Eurozone.
Within this context, we will raise some basic questions which accompany the issue of whether Greece can or cannot return to the drachma today. We will not, however, attempt to provide answers to these questions, as we do not support this particular option. This will, however, provide the opportunity to those who support a return to a national currency to provide their own answers; answers which we, however, request to be accompanied by real-life examples instead of economic theory. Answers which, in other words, are based on the real experiences of other countries.
Most importantly, we ask that examples which do not relate to the realities of Greece today be avoided, such as the idea that a country with a strong productive base cannot be threatened with currency devaluation, as Greece does not presently have such a productive base. On our part, we will publish all articles and answers are sent to us, as long as a serious argument that is supported by evidence is made. The questions we therefore pose are the following:
The total amount of public and private debt
All of the supporters of the drachma adopt, as a prerequisite, the refusal to repay the public debt. This argument is naturally made based on the knowledge that even if Greece were to return to its national currency, its external debts would remain in euros and would not be serviceable.
The first issue with this position is that private external debts (those of banks, businesses, etc.) are ignored. Naturally, these debts cannot be unilaterally written off, since in that case, the foreign lenders would be able to demand, via judicial means, their repayment, while there would be nothing to prevent these foreign lenders from proceeding with foreclosures, auctions, bankruptcies, and other similar possibilities.
Therefore, supporters of a return to a national currency have an obligation to provide an answer as to whether private debts would be converted to external debts, once they are sold by the Greek banks to foreign speculators—as well as older loans which had been issued via securitization. The total external debt is estimated at $420 billion (€375 billion)–therefore, if we subtract the public external debt, we are left with approximately €80 billion in private debt which, in the event of devaluation, would increase correspondingly.
Regardless, though, of the private external debt, is it even possible for our country to refuse to meet all of the obligations which our governments have signed off upon as part of the loan agreements which followed Greece’s bankruptcy and the debt haircut (PSI)? Is it possible for Greece to refuse to recognize English legal jurisdiction, without facing serious repercussions? How would Greece respond to the different categories of foreign lenders, including the ESM, the EFSF, the transnational lenders, the ECB, and the IMF? Would Greece be able to unilaterally write off the debts towards these lenders, and if so, how would it be able to do so?
Is Greece in a position, legally, to use its national sovereign interests to claim that it was forced into these agreements under duress, in order to protect itself from the judicial proceedings (such as foreclosures) of its lenders? If so, how would it be able to avoid the repercussions that would follow, which “took down” a country with almost no debt and with tremendous energy reserves, in the case of Russia?
For example, wouldn’t all of the nations-lenders of Greece follow up such actions with a recommendation, towards their citizens, to avoid Greece as a tourist destination, as a form of pressure towards us? Wouldn’t that lead to the collapse of our tourism industry, which would be the primary means through which we would be able to attain foreign exchange reserves (followed by exports and transport) in order to finance our tremendously high level of imports? Would they not be in a position to ban the import of Greek products?
In the graph which follows, Greece’s debts are presented as of mid-2015, for each category of lenders, including Greek banks, the Central Bank of Greece, and domestic bondholders:
Based on the above graph, it is necessary to analyze how Greece would reach to each distinct category of lenders, while there is also an obligation here to refer to the definition of odious debt, when (a) the loans have now been transferred to other creditors, who are not responsible for the actions of the original lenders, and (b) the debts of Greece were not the product of dictatorial regimes.
Here, it is heard that a prerequisite for the “legal” rejection of the totality of the debt as “odious debt” would be judicial charges of high treason to be levied against all those who signed the memorandum and loan agreements—an action which would require the departure of Greece from the Eurozone and the European Union, since such charges are illegal under European law (the departure from the EU is necessary, as it is otherwise not possible for a country to depart from the Eurozone).
In such an event, almost the entirety of Greece’s political system would face charges, a development which would be akin to a revolution, similar to that of Russia in 1918.
In such an event, almost the entirety of Greece’s political system would face charges, a development which would be akin to a revolution, similar to that of Russia in 1918. Who, however, would proceed forward with such a “popular uprising” in Greece, and in what way? Even if we assume that a referendum would take place, through which a majority of the Greek people would reject the euro, who would take over the reins and send all of the “traitors”—those who signed the memorandum agreements, to prison?
In closing, with regards to the viewpoint which says that the public debt is a result of usurious interest rates, this is unfortunately not only the case for our country, but for all of the other countries as well. Many historical examples exist, such as that of France during the reign of Louis XIV, which was making interest payments which were greater than the national income, a situation which led to the case of John Law (issuance of currency by the state, creation of a central bank, etc., as well as the development of the Mississippi bubble).
Access to the Global Markets
If we now assume that Greece was able to unilaterally write off its public debt via revolution and departure from the EU, how would it then be able to cover its trade deficit, until such time that it would be able to achieve a balance of trade? Clearly it would not be able to via the global markets, as they would no longer be lending to Greece. Furthermore, the claim made by politician Dimitris Kazakis, who is in favor of a return to a national currency, that Greece would be unable to access the global markets for only 5 to 6 years, is incorrect.
Argentina, 15 years following its bankruptcy, is only now attempting to borrow in the international markets
This would not be the case, based on the experience of Argentina which, 15 years following its bankruptcy, is only now attempting to borrow in the international markets, and having first repaid bondholders who were covered under English law, which had taken legal action against the country. Moreover, Argentina once again finds itself facing economic crisis and inflation.
The inability to borrow currency on the global markets leads, of course, to major problems in terms of imports, which a country with a destroyed productive base (such as Greece) would necessarily rely upon, especially for the import of basic goods which it does not produce, such as pharmaceuticals, industrial supplies, and energy.
It is estimated that Greece’s “inelastic imports”—those which are absolutely necessary, total several billion euros on an annual basis
It is estimated that Greece’s “inelastic imports”—those which are absolutely necessary, total several billion euros on an annual basis, which Greece would be obliged to pay for through its foreign exchange reserves, as it would be unable to utilize the approximately €25 billion which are in circulation domestically.
Within such a context, the answer that is often given is that the reserves of the Bank of Greece—which total €42 billion—would be used, in addition to the bonds of Luxembourg and Great Britain, totaling another €56 billion, which are said to be held in the portfolios of Greece’s four major banks, and which could be sold on the secondary market.
In such an event, aside from the fact that this would necessitate the revolutionary nationalization of the entire domestic banking and credit system—the problems of which we will refer to later in this piece—is it even really the case that we have €42 billion in the coffers of the Bank of Greece? If we assume that this money indeed exists, how can it be shown that Greece could actually use these funds, without essentially launching a coup against the European Central Bank (ECB)?
with such serious matters, it is advisable to avoid theoretical solutions, which often have little basis in reality.
The same exact questions exist with regards to the bonds held by the major banks, assuming they exist, since these claims are not fully supported by evidence and are indeed criminally misleading. It is also the case that with such serious matters, it is advisable to avoid theoretical solutions, which often have little basis in reality.
Furthermore, Mr. Kazakis claims that investments will become possible via the money that Greece will, by then, be minting, having restored its monetary sovereignty. Such sovereignty is indeed significant, but it does not constitute a magic wand. For instance, why don’t all the countries that possess their own currency do the same thing? Why do they borrow in foreign currency, if it was indeed so easy for these countries to print their own currency, distribute it to their population, and to accordingly invest and achieve growth perpetually?
it is clear that the conditions of the economy today are not the same with the conditions that existed during the post-war period
In any event, it is clear that the conditions of the economy today are not the same with the conditions that existed during the post-war period, when national restoration assured growth, the Marshall Plan came into force, globalization had not yet taken hold, and Greece was largely self-sufficient, based at least on the then-needs of its population.
The Financial System
Obviously, a transition to a national currency would have consequences for the overleveraged—if not bankrupt—Greek banks, aside from the fact that deposits (almost non-existent today) would have to be converted from euro to drachmas based on the new exchange rate that would be set at that time. According to the prevalent belief, the banks would have to be nationalized in order to then be recapitalized by the state.
How would it even be possible to nationalize certain banks which were just sold to foreign investors?
How would it even be possible though to nationalize certain banks which were just sold to foreign investors, and which in their remainder are owned by the Hellenic Financial Stability Fund, ownership of which has been turned over to the lenders via the Hellenic Republic Asset Development Fund (TAIPED)? Through a forced takeover? It would of course be possible for the state to create new banks, but this would not be a process that is as simple as it sounds, especially with the four major banks already exists, towards which the state has previously guaranteed a total of €203 billion.
On the other hand, again based on the prevalent view, which is of course logical, the Bank of Greece would also have to be nationalized. At present, only 6% of the Bank of Greece is held by the Greek state. How could this take place though when only a few years ago (in 2013), the bank’s charter was renewed for another 20 years?
At present, only 6% of the Bank of Greece is held by the Greek state.
Aside from this, wouldn’t such developments be followed by a direct confrontation with the shareholders of the banks, some of whom are powerful loansharks, and with the global financial behemoth, which would presumably not accept such a defeat? If it were this simple, wouldn’t Russia attempt to do the same with its own central bank, which does not belong to the Russian state and which is considered to be the country’s “Achilles heel”? Can anybody even trust any of the political parties of our country, in terms of its ability to enforce an independent monetary policy, and indeed in a bankrupt country that will have been completely isolated from the global markets?
The Exchange Rate of the New Drachma
Here, the claim that is often made is that a country which finds itself on firm economic footing has nothing to fear, in terms of a potential devaluation of its currency. Does Greece possess such an economy though? Wouldn’t the economy actually be weaker, at least in the initial period following its departure from the Eurozone and the EU, having refused to repay its debts? Even if, in the end, the devaluation would remain under 30%, following an improvement in the competitiveness of the Greek economy, wouldn’t the initial devaluation still reach 80-90%, based on the experience of other countries?
The next claim that is made—that a potential devaluation would not impact the national economy—is even more problematic, especially when the devaluation of the Norwegian Krone is used as an example! In other words, the example of a country which is characterized by its extremely strong productive base, its high level of exports, its strong energy production, and its trade surplus (for an analysis, click here).
imports will become even more expensive, leading to the country’s inability to purchase those goods which it does not produce domestically
The reason is because imports will become even more expensive, leading to the country’s inability to purchase those goods which it does not produce domestically, while it logically follows that it will take the country time in order to be able to produce such goods (automobiles, pharmaceuticals, fuels, etc.), as is the case with the example of Venezuela. Despite possessing some of the world’s largest oil reserves, the shelves of its supermarkets are empty, because it is unable to import while it does not produce the goods which it lacks.
Besides this, a devaluation disproportionally impacts the lowest income brackets, the unemployed, and pensioners, because their incomes will not rise, unlike those of the employed, who will demand commensurate increases in their wages. These wage increases, however, which are rarely prevented by governments, contribute to the overall upward spiral of wages and prices, where wage increases are followed by increases in the price of goods, leading to hyperinflation.
When one uses the example of Norway, instead of, say, the examples of Russia or the Ukraine, it follows that they would be led to incorrect conclusions, even if in the case of a country with high unemployment like Greece, inflation will not arrive immediately.
Of course, if with the simple minting of currency economic growth will follow (according to claims that are made), wouldn’t this also lead to a swift decline in unemployment? Wouldn’t wages and prices increase, especially when they would not face competition from foreign competition and also due to the fact that the initial production costs of the Greek products would certainly be higher? What would prevent inflation in this case, especially if all private debts are forgiven (!) and the income of the citizenry is therefore increased, as certain politicians claim?
The Governance of the Country
Continuing, even though we will pose additional questions in future articles, let’s take a moment to assume that none of the aforementioned problems will materialize and that solutions will be found.
do we really believe that in Greece there is such a political party that is so well-staffed, so competent and trained, that will not only wish to reintroduce a national currency but will also be able to implement it under present-day economic conditions?
In such a hypothetical scenario, do we really believe that in Greece there is such a political party that is so well-staffed, so competent and trained, that will not only wish to reintroduce a national currency but will also be able to implement it under present-day economic conditions? A political party that will be able to lead a “revolution” akin to the Russian Revolution of 1918, sending to trial all those who signed the memorandum agreements (a necessary precondition of refusing to repay the public debt, in the hypothetical scenario that this is possible)?
On the other hand, does anyone believe that the ECB and Germany would permit the success of such a party, knowing full well that this would open Pandora’s Box for the entire Eurozone? And what about the United States, who are promoting the creation of an “economic NATO” in addition to the existing military alliance?
Is Greece in a geopolitical, economic, and social position to enact such measures, without being faced with severe territorial losses? Will the country be able to survive in complete isolation from the West, even if we assume that it would be able to “switch sides” and potentially align itself with the likes of Russia, China, and Iran?
Finally, there also exists a series of technical problems, such as for example, contracts written out in euro, the euro notes which are in circulation, the loans that have been issued, and so forth; issues which are hardly insignificant and which are extremely difficult to survive on a unilateral basis, as in that instance the necessary time period for an orderly solution to be found for these issues is not assured.
We fully recognize that Greece is in danger of being completely looted if it remains in the Eurozone, as a result of its huge public debt; a debt which is not possible to be serviced, even if some magic formula was discovered which would allow the country to return to economic growth (a likely impossibility with the austerity measures that are being imposed and particularly with the manner in which the current government is enforcing these measures, insisting on tax increases instead of a reduction in public spending).
We also recognize that the goal of the lenders is to obtain control over the assets of the Greek people, having first exhausted their incomes—a fact which is evident through the increases in private debt which are following the levying of new taxes—with the ultimate goal of proceeding with the seizing and auctioning off of the assets of the middle and upper classes, which have not yet been completely looted.
we are of the opinion that our only realistic option is none other than the stoppage (postponement) of payments within the Eurozone
However, we are of the opinion that our only realistic option is none other than the stoppage (postponement) of payments within the Eurozone, which would enable our country to then commence the two-year negotiating period for departure from the EU, which is a prerequisite for exiting the Eurozone (if, of course, such a course of action is determined to be necessary). In such an event, this would allow us, in an orderly fashion and without serious consequences, to move forward with this departure, while gaining time to assure the proper circulation of the new drachma (a time period which has been estimated to be eight months).
Subsequently, we hope that by then (at the latest), all those other countries which are also being destroyed in piecemeal fashion by the policies being enforced by Germany—and especially countries such as France, Italy, and Spain—will react in kind. For these countries, a Eurozone exit is a more distinct possibility.
In such an event, it is quite possible that a return to the pre-euro period will be in store for all of us, following a pan-European debt conference where a joint write-off of that portion of the debt which cannot be serviced will be sought—a debt which indeed cannot be serviced without throwing the entire European continent into a spiral of economic depression, deflation, and chaos.
Of course, there exists an alternative solution as well: the financing of the excess debts by the ECB, an option which Germany is unlikely to ever agree to, no matter how much we may desire it. All of this, however, does not mean that we reject any discussion regarding the drachma—as long as the arguments that are made are based on substantiated, non-utopian claims which are based on the real-world examples of other countries which were able to succeed with such policies (if such countries indeed exist).
In closing, we will continue our own writings on this topic, in hopes of receiving answers from those who possess them, which we will, in turn, publish on our website, in order to foster a substantiated public discussion about this issue, which is necessary for the people of Greece to be fully and impartially informed.
Vasillis Viliardos is an economist, having completed his undergraduate studies at the Economic University of Athens and his graduate studies at the University of Hamburg. Following his studies, Viliardos was employed in private industry in Germany for a number of years. He is the author of three books about the global credit crisis, while he has published over 2,500 articles (print and online) analyzing economic matters, with a focus on national and global macroeconomic issues and the global financial system.
Original source: http://www.analyst.gr/2016/04/07/ta-erotimatika-tis-draxmis/2/