Market is expected to shoot up as Greece exits EU:
May be the work for designing a new Drachma has already begun!!
May be the work for designing a new Drachma has already begun!!
Tips for our "Confused" Finance Minister, Dr.Pranab Mukherjee: Austerity measures to save a non viable economy never works, because it tampers with growth. Therefore cut the interest rate fast and bring in growth in Indian economy. Forget the inflation fears for the time being, unless it become too menacing!! In a growing economy 10% inflation is normal. Stop giving your ears to those arm-chair/ivory--tower economists!! The Pre-Lehman US, had thousands of them but still why did the collapse happen??!! One needs to have some basic knowledge and more importantly "Common Sense", to apply economic principles...!!
Voters delivered a rebuke to PASOK--New Democracy's socialist partner in the outgoing coalition government in Greece-- stripping the party of 119 seats. New Democracy finished first in Sunday's voting but ended up with only 108 seats in Greece's 300-seat parliament. The earlier regime struck a bailout program which was meant to avoid a crippling financial meltdown; but the emergency funding required that the government slash spending. Under its second bailout program, approved last time, Greece has agreed to implement a series of austerity measures and undertake broader reforms to make its economy more competitive.
For two years, the country's massive amount of debt has threatened the stability of the eurozone. However, Greece pushed through a huge debt swap in March to save it from disorderly default and clear the way for it to receive a second bailout from the European Union, the European Central Bank and the International Monetary Fund, worth €130 billion ($171.5 billion). Thus the debt restructuring deal gave it some breathing space to the eurozone bloc. Greece has just concluded an agreement with the EU and the IMF on a second rescue package and a write-down of the debt due to private bondholders.
The country is in deep recession for the fifth year in a row and the new package has brought in more austerity. Faced with this grim outlook, several prominent observers, including Martin Feldstein (2011), Ken Rogoff, and Nouriel Roubini, have been calling on Greece to exit the Eurozone. Let us observe the pros and cons of this here.....
According to Miranda Xafam CEO, E.F. Consulting; former executive board member, IM, "Greece is the most highly regulated economy in the OECD. Profit margins or minimum remuneration is set by law in a number of professions (lawyers, engineers, accountants, pharmacists), and licensing requirements impose barriers to entry in others (trucking). It costs less to transport agricultural products from Central America to Greece by ship than it costs to transport them within Greece by truck. Labour contracts set wages on automatic pilot due to seniority clauses and other benefits unrelated to productivity, profitability, or performance. No amount of devaluation will get rid of these distortions".
She further says, "Appropriately, the new IMF/EU-funded programme includes broad-based structural reforms intended to introduce flexibility in labour markets and intensify competition in goods and services markets. In fact, the new Greek programme reads like a blueprint for reforming a post–Soviet bloc country circa 1990. It includes privatisation, administrative reform, labour and product market reform, and it provides for bank recapitalisation to ensure that the debt restructuring will not destabilize the banking system. While all this is positive for medium-term competitiveness and growth, it also means that the reform process will be protracted and politically difficult".
It took a long time for Greece to get into this mess and it will take a long time to get out of it. Joining the Eurozone in 2001 created the misconception that Greece’s standard of living could converge to the Eurozone average in one giant leap through a debt-financed consumer boom and increases in real wages not matched by productivity improvements. The elimination of exchange-rate risk reduced interest rates to historically low levels, while markets forgot about credit risk. The “Euro dividend” that slashed interest costs in the run-up to the monetary union was not used to pay for structural reform by compensating the losers. Inflation remained persistently above the Eurozone average and resources moved from the internationally competitive sectors, which are price-takers, to the increasingly lucrative sheltered sectors, such as construction and retail trade. As a result, the current-account deficit reached €26 billion in 2009 (11% of GDP) and narrowed only marginally to €21 billion (9.7% of GDP) in 2011.
Having lost access to capital markets since the spring of 2010, Greece is now borrowing from its Eurozone partners and the IMF to cover the gap between consumption and production. The EU/IMF-funded programme permits a soft landing through a mix of adjustment and financing, including the write-down of debt due to private bondholders that will significantly reduce the interest burden. Without the programme, there would be a hard landing to a lower level of consumption due to lack of financing to buy petroleum, medicines, and foodstuffs from abroad. Unilateral default, which some observers advocate, will not solve the problem in a normal way, because interest payments abroad account for just €12 billion out of the €21 billion current-account deficit. There is also a question mark whether a return to the drachma will alleviate the shortage of foreign exchange needed to maintain the current level of imports or not.
From the monetary fortress of the European Central Bank to the pro-European duchy of Luxembourg, policy makers are beginning to air their doubts that Greece can stay in the euro. Post-election tumult in Athens has put the once-taboo subject of an exit from the 17-country currency union on the agenda, lifting the veil on possible scenario planning afoot behind the scenes.
After 386 billion euros ($499 billion) in aid pledges for Greece, Ireland and Portugal, 214 billion euros in ECB bond purchases and another trillion euros in low-interest loans for banks, plus 17 high-level crisis summits, Greece's political chaos thrust Europe into a perilous new phase. The world is witnessing an "important moment in European Union history, a moment of crisis," EU President Herman Van Rompuy said in Brussels on the 62nd anniversary of the declaration by Robert Schuman, then France's foreign minister, that launched postwar European integration.
However, some analysts are looking at the one recent case with some similarities to the situation with Greece, it is Argentina. It had as hard a currency pact with the dollar as a country could have without unification of the two---One Argentine peso was fixed to be worth exactly one dollar. So one could pay up the restaurant bills wit both Peso and Dollar. But Argentina was strangled with un-payable sovereign debts. It defaulted and uncoupled its peso from the dollar in 2001. The accounts were frozen to prevent people from exchanging all their pesos for dollars. When the peso was allowed to float on currency markets, it would be worth much less than the dollar.
But the parallels between Greece and Argentina are limited. In the midst of its pain, the South American country had one big asset: it grows massive quantities of soy beans, which China imports to feed its people. Almost immediately following the depreciation of the peso, Argentine soy exports to China soared. The Argentine economy began to grow rapidly. So a violent contraction in GDP was followed by a decade of solid growth. The problem for Greece is that it doesn't export much. A fifth of its GDP comes from tourism. It has abundant sunshine, but may already have mortgaged the future of Project Helios solar energy farm to the project's German backers.
The country is in deep recession for the fifth year in a row and the new package has brought in more austerity. Faced with this grim outlook, several prominent observers, including Martin Feldstein (2011), Ken Rogoff, and Nouriel Roubini, have been calling on Greece to exit the Eurozone. Let us observe the pros and cons of this here.....
According to Miranda Xafam CEO, E.F. Consulting; former executive board member, IM, "Greece is the most highly regulated economy in the OECD. Profit margins or minimum remuneration is set by law in a number of professions (lawyers, engineers, accountants, pharmacists), and licensing requirements impose barriers to entry in others (trucking). It costs less to transport agricultural products from Central America to Greece by ship than it costs to transport them within Greece by truck. Labour contracts set wages on automatic pilot due to seniority clauses and other benefits unrelated to productivity, profitability, or performance. No amount of devaluation will get rid of these distortions".
She further says, "Appropriately, the new IMF/EU-funded programme includes broad-based structural reforms intended to introduce flexibility in labour markets and intensify competition in goods and services markets. In fact, the new Greek programme reads like a blueprint for reforming a post–Soviet bloc country circa 1990. It includes privatisation, administrative reform, labour and product market reform, and it provides for bank recapitalisation to ensure that the debt restructuring will not destabilize the banking system. While all this is positive for medium-term competitiveness and growth, it also means that the reform process will be protracted and politically difficult".
It took a long time for Greece to get into this mess and it will take a long time to get out of it. Joining the Eurozone in 2001 created the misconception that Greece’s standard of living could converge to the Eurozone average in one giant leap through a debt-financed consumer boom and increases in real wages not matched by productivity improvements. The elimination of exchange-rate risk reduced interest rates to historically low levels, while markets forgot about credit risk. The “Euro dividend” that slashed interest costs in the run-up to the monetary union was not used to pay for structural reform by compensating the losers. Inflation remained persistently above the Eurozone average and resources moved from the internationally competitive sectors, which are price-takers, to the increasingly lucrative sheltered sectors, such as construction and retail trade. As a result, the current-account deficit reached €26 billion in 2009 (11% of GDP) and narrowed only marginally to €21 billion (9.7% of GDP) in 2011.
Having lost access to capital markets since the spring of 2010, Greece is now borrowing from its Eurozone partners and the IMF to cover the gap between consumption and production. The EU/IMF-funded programme permits a soft landing through a mix of adjustment and financing, including the write-down of debt due to private bondholders that will significantly reduce the interest burden. Without the programme, there would be a hard landing to a lower level of consumption due to lack of financing to buy petroleum, medicines, and foodstuffs from abroad. Unilateral default, which some observers advocate, will not solve the problem in a normal way, because interest payments abroad account for just €12 billion out of the €21 billion current-account deficit. There is also a question mark whether a return to the drachma will alleviate the shortage of foreign exchange needed to maintain the current level of imports or not.
From the monetary fortress of the European Central Bank to the pro-European duchy of Luxembourg, policy makers are beginning to air their doubts that Greece can stay in the euro. Post-election tumult in Athens has put the once-taboo subject of an exit from the 17-country currency union on the agenda, lifting the veil on possible scenario planning afoot behind the scenes.
After 386 billion euros ($499 billion) in aid pledges for Greece, Ireland and Portugal, 214 billion euros in ECB bond purchases and another trillion euros in low-interest loans for banks, plus 17 high-level crisis summits, Greece's political chaos thrust Europe into a perilous new phase. The world is witnessing an "important moment in European Union history, a moment of crisis," EU President Herman Van Rompuy said in Brussels on the 62nd anniversary of the declaration by Robert Schuman, then France's foreign minister, that launched postwar European integration.
However, some analysts are looking at the one recent case with some similarities to the situation with Greece, it is Argentina. It had as hard a currency pact with the dollar as a country could have without unification of the two---One Argentine peso was fixed to be worth exactly one dollar. So one could pay up the restaurant bills wit both Peso and Dollar. But Argentina was strangled with un-payable sovereign debts. It defaulted and uncoupled its peso from the dollar in 2001. The accounts were frozen to prevent people from exchanging all their pesos for dollars. When the peso was allowed to float on currency markets, it would be worth much less than the dollar.
But the parallels between Greece and Argentina are limited. In the midst of its pain, the South American country had one big asset: it grows massive quantities of soy beans, which China imports to feed its people. Almost immediately following the depreciation of the peso, Argentine soy exports to China soared. The Argentine economy began to grow rapidly. So a violent contraction in GDP was followed by a decade of solid growth. The problem for Greece is that it doesn't export much. A fifth of its GDP comes from tourism. It has abundant sunshine, but may already have mortgaged the future of Project Helios solar energy farm to the project's German backers.
The problem for Greece is that it doesn't export much. A fifth of its GDP comes from tourism. It has abundant sunshine, but may already have mortgaged the future of Project Helios solar energy farm to the project's German backers.
Now, what happens if Greece dumps euro and goes for, drachmas or in the event that Greece is forced to return to its old currency. If that happens then its banks will have to close down to prevent depositors from withdrawing euros or wiring their capital to a bank in France or Germany. Private bond holders who have already agreed to write off half the value of their Greek bonds will be told that they will only get 30% of the face value (or even less) of their bonds. If they balk, they will have to be told, "Sue us."
If we draw parallel then we find that in January 2002, the Argentine government declared a unilateral moratorium on debt repayments. There followed three years of negotiations with bond holders before the Argentine government announced it would exchange the old bonds for new paper "worth around 30 cents on the dollar, according to an expert. You can imagine what this lead to: litigation — lots of it. The suits are still unresolved. As a result, Argentina still can't borrow money on private markets. So, same formula can be applied for Greece. Now, those European Banks, who hold small amount of Greek debt can be re-capitalized but those holding large amounts shall be allowed to go bust or fail.
Greece pulling out of the euro would be ‘a messy affair’ but then in the end, the new currency would devalue quickly, making the economy competitive again and providing the prospect of an export-led economic recovery – an impossible hope within the eurozone.
There are already rumours that, big bosses in Greece have already shifted their multi-millions out of Greek banks.
They say, much of it went to Switzerland. Indeed, the flood of Greek euros gushing into Zurich is suspected to be one of the reasons the Swiss National Bank last year had to take fierce steps to stop the rocketing value of the Swiss franc. This is good news. It means that much of Greece’s big money is already abroad and safe from devaluation – and therefore ready to come back into Greece for investment once things calm down under the new drachma.
And investment not least in the Greek tourist industry. Because the first result of the Greeks dropping out of the euro and into a new, cheaper drachma is that Greece will offer the cheapest holidays in Europe. At the moment, any Irish tourist arriving at Athens airport is arriving with euros, aka German currency, in his pocket. He will have to pay for hotels and meals in German currency. Imagine instead he could take this German currency to the exchange bureau at Athens airport and buy some new, cheap drachmas with it: holiday lotto win. So, isn't it interesting??!! The Greek tourist industry will boom once the country is out of the euro.
Now, what happens if Greece dumps euro and goes for, drachmas or in the event that Greece is forced to return to its old currency. If that happens then its banks will have to close down to prevent depositors from withdrawing euros or wiring their capital to a bank in France or Germany. Private bond holders who have already agreed to write off half the value of their Greek bonds will be told that they will only get 30% of the face value (or even less) of their bonds. If they balk, they will have to be told, "Sue us."
If we draw parallel then we find that in January 2002, the Argentine government declared a unilateral moratorium on debt repayments. There followed three years of negotiations with bond holders before the Argentine government announced it would exchange the old bonds for new paper "worth around 30 cents on the dollar, according to an expert. You can imagine what this lead to: litigation — lots of it. The suits are still unresolved. As a result, Argentina still can't borrow money on private markets. So, same formula can be applied for Greece. Now, those European Banks, who hold small amount of Greek debt can be re-capitalized but those holding large amounts shall be allowed to go bust or fail.
Greece pulling out of the euro would be ‘a messy affair’ but then in the end, the new currency would devalue quickly, making the economy competitive again and providing the prospect of an export-led economic recovery – an impossible hope within the eurozone.
There are already rumours that, big bosses in Greece have already shifted their multi-millions out of Greek banks.
They say, much of it went to Switzerland. Indeed, the flood of Greek euros gushing into Zurich is suspected to be one of the reasons the Swiss National Bank last year had to take fierce steps to stop the rocketing value of the Swiss franc. This is good news. It means that much of Greece’s big money is already abroad and safe from devaluation – and therefore ready to come back into Greece for investment once things calm down under the new drachma.
And investment not least in the Greek tourist industry. Because the first result of the Greeks dropping out of the euro and into a new, cheaper drachma is that Greece will offer the cheapest holidays in Europe. At the moment, any Irish tourist arriving at Athens airport is arriving with euros, aka German currency, in his pocket. He will have to pay for hotels and meals in German currency. Imagine instead he could take this German currency to the exchange bureau at Athens airport and buy some new, cheap drachmas with it: holiday lotto win. So, isn't it interesting??!! The Greek tourist industry will boom once the country is out of the euro.
Now, if there is a return to the drachma − the Greece banks are about to be made more-or-less bust anyway by the so-called controlled default which the eurozone is still trying to negotiate with investors. Otherwise, they could go for 70% devaluation. When Greece leaves the euro, or just before, it will whack the remaining 30% cent off its debt. Then it will be starting its new life, with its new currency, without debt. Already Greece has its finances enough in order that its revenues now pretty nearly cover its outgoings, except for the cost of financing the sovereign debt. And at last Greece could walk away from that debt--a victory of Drachma over Euro at last. Yipeeeeeeeeeeee!!
Euro banknotes have a code which shows which Eurozone member has issued them. The code letter for Greece is "Y".
We can assume that during that changeover weekend, a fixed exchange rate will be announced between the euro and the new drachma. So the Greek government can use its "Y" currency as drachmas until new notes are printed. As for bank deposits, the Greek government could pass a law saying that all deposits by Greeks in local banks will be deemed to be in the new currency. Foreigners holding accounts could be given a choice whether to keep their deposits in euros or switch them to the new currency.
As for why a foreigner would want to let his account be switched to new drachmas − which of course would be devalued against the euro, that would be the point of dropping out of the single currency − he probably wouldn’t. Which is why most foreigners with Greek bank accounts must have already shifted out their money.
One way to deal with the danger of a run on deposits collapsing the banks is to offer depositors an interest rate so high in the short term that it could compensate for the devaluation risk or the banks could be nationalized.
Or the banks could attract deposits from elsewhere, borrowing on the inter-bank market. And after that, it gets technical, but just remember that devaluation is a decision made by many different countries throughout financial history.
But if Greece stays in the euro, the pain will be much longer and deeper, and real economic health cannot return.
For Greece, it is well worth the suffering to be free again, free to rebuild its businesses and employment, free to attract every foreign investor to its newly cheap commercial property and newly low cost labour − and every one of us to its beaches and tavernas.
"Politically speaking, Greece is already out of the euro zone," Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed note. "The only question is about the timing and disorderliness of its exit".
Euro banknotes have a code which shows which Eurozone member has issued them. The code letter for Greece is "Y".
We can assume that during that changeover weekend, a fixed exchange rate will be announced between the euro and the new drachma. So the Greek government can use its "Y" currency as drachmas until new notes are printed. As for bank deposits, the Greek government could pass a law saying that all deposits by Greeks in local banks will be deemed to be in the new currency. Foreigners holding accounts could be given a choice whether to keep their deposits in euros or switch them to the new currency.
As for why a foreigner would want to let his account be switched to new drachmas − which of course would be devalued against the euro, that would be the point of dropping out of the single currency − he probably wouldn’t. Which is why most foreigners with Greek bank accounts must have already shifted out their money.
One way to deal with the danger of a run on deposits collapsing the banks is to offer depositors an interest rate so high in the short term that it could compensate for the devaluation risk or the banks could be nationalized.
Or the banks could attract deposits from elsewhere, borrowing on the inter-bank market. And after that, it gets technical, but just remember that devaluation is a decision made by many different countries throughout financial history.
But if Greece stays in the euro, the pain will be much longer and deeper, and real economic health cannot return.
For Greece, it is well worth the suffering to be free again, free to rebuild its businesses and employment, free to attract every foreign investor to its newly cheap commercial property and newly low cost labour − and every one of us to its beaches and tavernas.
"Politically speaking, Greece is already out of the euro zone," Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed note. "The only question is about the timing and disorderliness of its exit".
References:
(iii) http://www.voxeu.org
(iv) http://www.cnn.com
(v) http://www.yahoo.com
(i) http://www.dailymail.co.uk
(ii) http://www.globalpost.com(iii) http://www.voxeu.org
(iv) http://www.cnn.com
(v) http://www.yahoo.com
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