Τρίτη, 25 Οκτωβρίου 2011

Return to the Drachma: 15 Reasons to Say NO

I think for any economist there is no doubt that returning to the drachma will be much worst that stying in the Euro area.
It seems to me obvious but since you mentioned here are some of the key reasons:

1. It is the worst time to introduce the new currency to the markets! it is like a company that
is in severe financial distress contemplating whether it is a good time to issue new stock.
The new drachma, the financial asset that some people insist we need to issue will be
severely devalued in the markets!

2.Our debt would still be denominated in euros and not the new drachma. This fact and #1
above would imply that our debt will double or triple.

3. From #1, all imports will become twice as expensive. Imagine auto gas at 4 euros per liter.
At the same time since oil and its derivatives are getting very expensive, the costs of
electricity, mass means of transportation, etc will increase accordingly. All these mean that
the production costs in Greece will skyrocket!

4. A corollary of #1 is that exports will increase as we become more competitive. But, #1
with #3 imply that there will be no effect on competitiveness due to the devaluation.

5. Poverty will rise as more and more of the households' income is spent on the basics that
are now getting more and more expensive according to #1 and #3.

6. Risk in terms of exchange rate fluctuations of the new drachma with respect to the other
currencies will increase. An immediate result is that economic transactions with Greece will
have to be burdened by hedging costs.

7. Foreign direct investment that is one of the few gateways to economic growth at this point
in time, will decrease as a result of the new currency and #1 as the implied risk for the
foreign investors will increase sharply, according to #6, now that the security of the euro is lost.
Increased risk means lower investment as most low to normal yielding investment schemes
will now be rendered not feasible.

8. Transaction costs will increase with the rest of Europe. As European countries are our main
trade partners, this will further reduce international trade.

10. From #8, lower international trade and transactions imply a lower degree of prosperity and
growth.

11. The interbank borrowing rates will sharply increase for Greek financial institutions leading
to borrowing and of course investment funds shortages leading to high interest rates, a lower
internal investment rate, lower production, employment and income.

12. Price parity will decrease and this is cost that the households will have to bear on top of
all the other costs of the new currency regime.

13. Inflation will become a more important issue than it is so far. The new currency will create
inflationary expectations ad will result into inflation worsening the economic landscape of Greece
as a good place in doing business.

14. The Greek state when borrowing in terms of the new currency will have to pay significant risk
premiums to its bond issues leading to high interest rates.

15. Tourism the main inflow of foreign currency reserves will decrease as a result of the exchange
rate risk and the price uncertainty as prices now will be denominated in the new currency.

16. The new Greek currency will be far more easier manipulated and highly exposed to speculative
attacks than the strong euro is now.

The list can go on.

Thus, it is not clear to me as an economist why someone would advocate the return to the drachma....

The best solution is the Eurobond.

The second best solution is the creation of an SPV (Special Purpose Vehicle) that will assume the
Greek sovereign debt and collateralize it in terms of Greek government real estate (or aother types
of collateral) property.