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Birth of new Greek drachma would be pained, rushed

A post-euro Greece could find itself struggling to import food and fuel, with everyday life reduced to barter in goods and services

Reuters  |  Washington 

If or when policymakers finally decide Greece should leave the euro, the exit could happen so quickly that "new drachma" currency notes might not be printed in time.

In principle, some of the long-term consequences of Athens leaving the currency bloc are not unappealing. The euro zone would no longer have to worry about what has always been its weakest link. While a new Greek currency would almost certainly immediately crash in value as soon as it was issued, in doing so it would make the Greek much more competitive.

But the short-term effects would be brutal, both domestically and on the global A post-euro Greece could find itself struggling to import food and fuel, with everyday life reduced to barter in goods and services and the government unable to pay workers in anything they would want to receive.

"It would be chaos," says Marios Efthymiopoulos, a visiting scholar at Johns Hopkins University Centre for Advanced Studies and president of Thessaloniki-based think tank Global Strategy.

"The banks would collapse and you would have to nationalise them. You wouldn't be able to pay anyone except in coupons. There is only one (currency) printing press in Greece. It is in the museum in Athens and it doesn't work any more."

The cost of managing what is increasingly being termed "Grexit" - with its resulting global market turmoil and colossal financial pressure on Spain and Italy - could dwarf the cost of keeping Greece on financial life support. But with northern European states - and their electorates - becoming tired of bailouts, the probability is seen clearly on the rise.

World leaders meeting at the G8 at Camp David recommitted themselves to keeping Greece in the euro zone, underlining worries over the costs of an exit. Not everyone believes that will prove enough. The unknowns, however, are enormous.

"There's so much we don't know," says Domenico Lombardi, a senior fellow specialising in the global at the Brookings Institution. "If Greece leaves the euro, it will also have to leave the EU," he added, though some suggest treaties may be interpreted or amended to keep Athens in the wider bloc.

Lombardi questioned how much help Greece could count on: "How much support is there? Probably not very much. It's very hard to know what they could practically do."

With life for the Greek people changing overnight with a euro exit, social turmoil would be inevitable. Whoever made the decision - if it were to be made in Athens at all - could certainly not count on being in power weeks or even days later.

"It would be truly revolutionary, in every sense of the word," says Tyson Barker, head of transatlantic relations at the Bertelsmann Foundation. "There are various ways it could be done ... but you could end up like Cuba with use of multiple currencies or with essentially a barter economy, at least in the early days."

Private companies and foreign states, including Britain and the United States, have detailed contingency plans for euro zone collapse. Greece, however, is in a more delicate position.

Had it become public knowledge that any Greek government was preparing to leave, the resulting panic could easily have made it a self-fulfilling prophecy.

Already this week, Greek savers - and smaller numbers elsewhere in the southern euro zone - have begun to take money from banks. Tourists are staying away, exporters are demanding cash up front.

Should Grexit ever happen, it would have to begin within days or even hours of the decision being made at the top.


But just as it increasingly appears incapable of pushing through the tough austerity measures and reforms required by lenders under the terms of existing bailouts, Athens might prove simply unable to take the decision to leave. Almost without exception, its political leaders have pledged to remain in the single currency even if they opposed the bailouts.

In theory, there is no provision under EU treaties for Europe's other states to unilaterally kick out a member. But in reality, analysts and officials say they could effectively freeze Greece out by closing its access to European Central Bank lending.

That might effectively force Greece to issue its own currency as it might not have any other way of paying workers or providing enough cash to keep the economy moving.

At that stage, Greece would likely also attempt to convert all local and perhaps also its international debt into the new and rapidly depreciating currency. Its international creditors, however, would cry foul. That would likely be the beginning of a debt restructuring that could last years. But historic debts would be the least of Greece's immediate problems.

Even the physical production of a new currency would be fraught with problems. Any foreign firm hired to print Greek notes would almost certainly require money up front. Any coupons or temporary notes produced locally might swiftly be forged, rendering them even more worthless.

As in some other non-euro zone states such as Montenegro, the euro might remain the principal currency for many transactions. But it would be in much shorter supply and be beyond government control or even influence, making it almost impossible to use for salaries or benefits payments.

Euro savings held in Greek banks would inevitably be redenominated in the new currency -- with its rapidly slumping value. Physical euro notes already in circulation, however, would retain their value or even become much more prized.


It would most likely be necessary to close borders to stop Greeks smuggling out euros to stash in banks elsewhere. But with hundreds of miles to cover, much of it in inaccessible mountain, wood and scrubland, security forces would be stretched thin.

Simultaneously, police would likely have to manage a dramatic spike in unrest and perhaps more political and criminal violence. Already, there have been isolated examples of Germans -- or those suspected of being German -- being assaulted in apparent anger over EU-enforced austerity.

Greece's leaders could decide to deploy the army onto the streets in an attempt to reassure the population and bring calm. But that could prove deeply divisive.

"If this happens, there are definitely going to be security incidents in the streets of Athens," says David Lea, Western Europe analyst at Control Risks. "But the Greek military is not designed to deal with this. It's designed to deter Turkey. And you have to remember, this is a country with a recent history of military dictatorship and using it could go down very badly."

Rarely would a country have needed international financial aid so desperately. But euro zone countries would likely want to preserve their financial resources to protect other states, particularly Italy and Spain, and might even push the IMF to hold back. In a tightly fought US election year, financial aid from the United States would also be virtually unthinkable.

Greece could try to turn elsewhere. In 2008, Iceland raised eyebrows amongst other NATO members when it approached Russia for a massive financial loan that many suspected would come with strategic strings attached, perhaps rights to use military bases on the island. But neither Moscow nor Beijing are seen particularly keen to take on Athens's woes.

In easier times, it might have been possible to extricate Greece quietly and slowly. Dozens of countries have successfully left currency blocs since 1945, mainly colonial states breaking free of their former masters. But doing it under this much pressure and global market focus makes that impossible.

"An exit is technically feasible," said Lea at Control Risks. "But managerially, it is extremely difficult to do well. It requires a lot of planning and a lot of agreement. And given current circumstances, there is no chance of that."

First Published: Mon, May 21 2012. 04:01 IST