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They are almost certainly going to face it, and face it outside of the Euro. At this point, that's probably their best choice.
However, it will be tough. (Suppose you found out that all your money, which you thought was safe in the bank, will be converted tomorrow from Euros into something whose value you do not and cannot know.... This is why the Greeks were polling overwhelmingly to stay in the Euro, even though they also polled overwhelmingly against the austerity imposed in the negotiations. That's probably why, even after the referendum, the Greek government basically agreed with the European demands. Serious change is tough.)
OK, I recognize that someone should stop me from posting more about Greece. It's just that it's interesting, and new developments come up all the time.
For instance, I came across an interview with the ex-Finance Minister, Yanis Varoufakis, that was conducted after his resignation but before the (current) deal.
There's some fairly self-serving recounting of the negotiations -- and, of course, everyone will try to paint themselves in a good light, especially when they basically failed, and I can't blame him for that -- and also some really interesting insider stuff (which may be true) about how the core leadership of Syriza viewed things and made decisions as developments happened.
Aside from the rest of it, I was really interested in the fact that the Finance Ministry, or at least a small group within it under Varoufakis, had drawn up detailed plans for what would have been an exit from the Euro, if carried out. I have seen very similar discussions by others of the steps to take, and they hit all the bases (well, except one):
1. The Greek government would issue IOU's (also known as "scrip"), to the banks to be used in place of Euros. However, they would still be denominated in Euros, rather than "drachmas" or something else, and would be eventually payable in Euros (theoretically) with an (initial) official one-to-one valuation to the Euro. It would in fact become a de facto new currency. All transactions, including (ahem) bank withdrawals would be made in the new IOU scrip, as would payment of taxes and other debt. This would let the banks re-open and would prevent commerce from grinding to a halt. Of course, the official exchange of one-to-one with the Euro would not last long (2 seconds?)
2. A fairly big "haircut" (debt repudiation) of the outstanding debt. Not a surprise, and inevitable, one way or another.
3. Taking control of the Bank of Greece. I'm not sure who would otherwise have control of it; I have read elsewhere that it was controlled by opponents of Syriza. I also have read that it was under formal control of the ECB. Whatever, it obviously is necessary to control the national bank in order to control the currency.
The one thing they slipped on, in my view, was denominating these IOU's in Euros. They were still hoping to be let back in, even though this plan actually would have meant Grexit, the end of Greece in the Euro monetary zone. That's why the plan didn't include retooling the printing presses to print up a bunch of drachmas and use them to redeem the IOU's instead of Euros.
These would have been strongly assertive moves. I don't know if the government had the formal power to make them, or if they would have required a vote in Parliament, or what. It would have been very interesting to see.
As a note: there is a consensus, at least among what I have read, that these steps were the correct ones to take to implement Grexit (well, the debt repudiation is not itself a part of Grexit, although it would have happened if they went that far.) It's not surprising that they hit all the main points -- no matter how Varoufakis may be viewed by those who don't care for him, he is a well-known economics professor and no fool on technical matters. But the most interesting thing, for me, is that they still thought they might be able to stay in the Euro if they did all this!!! That's why the IOU's were to be denominated in Euros: so they could be repaid in Euros when all this unpleasantness had blown over.
That hope was naive, of course. The thing is that the ideal of one unified Europe has such power that it inspires people even when they are trying to break away.
It may be that they should have gone ahead with it. But besides the appeal of a united Europe, there was also the reality that it would have been hard to go it alone. Even after the referendum, the 6 key members of Syriza (which included Varoufakis) voted down the idea by a 4 - 2 vote, and essentially they had no other options but surrender. Soon Varoufakis was out.
All right, if anyone is still reading this, enough of my interpretations. Here's the interview. I hope it sheds some light on these events....
That is one of the first steps towards a new currency.
I have family in Argentina that explained to me how was the monetary policy before the currency conversion.:
The first issue is that the government literally runs out of money (you might have heard about liquidity problems in Greece). This happened in Argentina at a provincial level first and national level later, and was (is?) already happening in Greece.
When the government runs out of money, it can't pay salaries, pensions, debts and other expenses. If this debt is not very large, to avoid distortions they often issue these IOUs (denominated in euros in the case of Greece because, just like the argentininan government didn't want to accept they where broke, the greek government doesn't want to leave the euro) and force large companies and suppliers to use it-in exchange for some benefits- and try to use the money they have left to pay their obligations with banks and other States.
But if this shortage in liquidity is very large, they are forced to make normal people use these IOUs and in this case,it is no longer a mere "credit" as the bond becomes a "quasi-currency" since it will be able to circulate and cancel debts.
This is more or less how it worked in Argentina:
1) Different provinces start to issue this quasi-currency (different for each province), and shaped it just like regular banknotes so people would easily recognize them.
2) Since it was not a "real currency" it was not mandatory between individuals, so in order to facilitate its circulation they started to accept them for tax payments.
3) To make it circulate even more, the government came to an agreement with different supermarkets to accept the IOUs. This way people could buy food with it and it helps to accept it.
4) After a few months they started to pay a portion of the salary of public employees with them (10% first, then 20%, then 30%, ...)
5) Later they let companys do the same with their own employees.
6) And finally they agreed that a debt paid with these IOUs was cancelled. Thus, they practically converted these bonds into currency without officially and legally say it.
How did it work in practice?
As I said, if the amount of money doesn't get out of hand it can work. Public employees and suppliers of the state began to receive 10%, 20% or 30% of their payments in quasi-currency, but they did not complain because they didn't lowered their salary. if they earned 1000$, now they earn 700$ and 300&, and still had 1000$ (in their heads).
The 300& were used to pay food and this way they accepted them. Companys also accepted it becasue they could pay taxes with it. This system produces large imbalances but it works short term (it lasted 2-3 years until the final conversion in Argentina).
Of course a huge black market of currencies emerged with time and it was present everywhere.
I don't want to make this post longer so if anynone has a question about the process or something I'll gladly answer it.
In real world USD terms that meant from parity to more than 9 ARS per USD and still counting.
(Please replace "," with "." if you don't have European system locals.)
Chart: ARSUSD
For Greece, some economists also forecasted a devaluation of 60-85% over the medium term (5-10 years) ...
The real problem is not Greece. Greece is a comparatively rich country
- which has been overspending for more than a decade
- which has accumulated a huge debt
- populated with citizens who do not pay taxes (this habit goes back to the time of the Ottoman Empire, when not paying taxes was a virtue)
The Greek debt is no problem for Europe. Greece is a small country with a population of 11 million only. Compare it to Bavaria with a population of 12 million.
The main problems are elsewhere:
(1) If it gets easy to get rid of some of the debt we are running into a case of moral hazard
-> when bad behavior such as overspending is taken care of by other European countries, nobody will try to maintain orderly budgets
-> Italy, Portugal, Spain and France may try to get rid of their debt in the same way and continue overspending as they have done in the past
-> no other European country is rich enought to pay for Italy, Spain and France
Therefore the first villain needs to punished, the behavior of bad boys cannot be honored, if budget discipline is to be maintained somehow in Europe
Therefore a debt cut is no solution. Help the Greeks paying interest, but do not allow for any haircut!
(2) If you see Europe as a social community you should transfer money from the rich to the poor. Not from the rich to the rich.
Europes poor countries are (ranked by GDP per capita)
Bulgaria 7,752
Romania 10,034
Hungary 13,881
Croatia 20,904
Latvia 21,381
Portugal 21,408
Lithuania 23,876
Slovenia 24,417
...
...
...
Greece 29,635
Spain 31,946
UK 35,334
Italy 35,823
Iceland 37,977
Why should Europe pay for a decade of Greek parties? That said only rich Greeks benefitted, the poor did not, but that is an internal Greek problem.
Therefore Greece cannot get away with the problem they have created.
If there was no moral hazard involved and if there were not so many countries with a per capita income of about a third of Greece, there would not be any problem to pay for the debt.
This is a good analysis, but I think it is past the time when it would have been workable as a solution, in this sense:
- Greece, in my opinion, is not going to repay its debts.
- Now, if Greece does not, then, as @Fat Tailspoints out, some or all of the group consisting of Spain, Portugal, Italy, and let us add possibly Ireland, probably will not repay theirs either. It will become very tempting to populist parties in those countries to seek debt relief through debt repudiation.
- It may be too late to worry about moral hazard. However this is parsed, the situation is not likely to be stable or to be contained. If Greece reneges, it is just a matter of time before others do, and then it will be too late for "budget discipline ... to be maintained somehow in Europe."
If Greece repudiates its debt, then turmoil will of course ensue, and not only in Greece. Greece will have to exit the Euro, and the international banking system, for some time. However, if they are willing to do it, then their economy will eventually come back. They are in the position of every debtor who really does not feel they are in a position to pay, and has to decide whether they will continue paying their creditors or stop paying and accept the consequences.
It is a decision that is faced, and made, one way or another, by individuals and businesses all the time, and sometimes by nations. I think it is most reasonable to assume that they will decide to not pay, however that decision is justified, and then the unraveling of the Euro project is very likely to begin.
Obviously, this conclusion will turn out wrong if they just leave by themselves and no one else follows, and certainly it will be wrong if they decide not to renege after all. But that's where I think the probabilities now lie.
