DRACHMA DRAMA
Return to old currency no easy fix.
With Greek banks slated to remain closed for the rest of the week, and cash withdrawals limited to €60 per day, many are speculating that a return to the drachma may be ahead. But changing currencies — especially on the fly in the middle of a crisis — is no simple feat, and it brings with it painful economic consequences, the first of which is uncertainty itself.
Over the last few weeks, Greece has been negotiating with the International Monetary Fund (IMF) and other eurozone countries for billions in new loans. But creditors have demanded that the country make reforms and cuts in exchange for the funds, which it is refusing to do. Greece has closed the banks in order to prevent euros from flowing out of the system, a move that could be seen as a precursor to so-called “Grexit,” the departure of Greece from the eurozone monetary union.
Going so far as to reintroduce the drachma, however would take a number of additional steps.
Bank accounts and debts denominated in euros would have to be suspended, says William Huggins, a finance lecturer at the Rotman School of Management.
“The government would create a new currency with a nominal exchange rate to the Euro and then start printing it up to meet their obligations and the demands of bank withdrawals,” he said. “As expected, printing currency like that would quickly depreciate its value, leading to a rapid breakdown of the nominal exchange rate.”
New legislation would also have to be passed in parliament in order for the new currency to be official.
The decommissioned drachmas, which were taken out of circulation in 2002, cannot be used; so new notes based on the old design would also have to be printed. The cost of printing an entirely new currency would cost a country the size of Greece roughly $50-$60 million, and could take three to six months.
In 2012, U.K.-based De La Rue, the world’s largest banknote manufacturer, drafted contingency plans for printing drachmas in case Greece pulled a “Grexit.” Director of marketing for De La Rue, Rob Hutchison, told Reuters, “You have to consider the preparation of special banknote paper incorporating security features; the design of the notes; the process of bringing these elements together and then printing.”
A crucial part of the process is to get the currency into the system with a campaign in place to help citizens understand how the new currency would work. Banks and business would have to plan to adapt their systems.
“The full way is to convert all payments into drachmas overnight, but the question then is can the IT departments handle this and differentiate between genuine Euro transactions and new Drachma transactions? Think of a Greek company currently putting all euro transactions into one chequing account, now it has to have two,” says Laurence Booth, CIT Chair in Structured Finance at Rotman. “The immediate impact on the Greek economy of a devalued currency would be to raise the cost of imports and to reduce the value of all savings, which would now be denominated in the new currency,” says Huggins.
By reverting to the drachma, tensions would rise between Greece and fellow European governments to whom they are financially obligated, including Germany, France, Italy and Spain, the latter two with considerable debt of their own. A default on debts owed to them would lead to a considerable contagion, potentially resulting in a domino effect for big creditors.
Supporters of the so-called fix say that it would boost exports and tourism, but it would also lead to a drop in living standards for citizens, and cause inflation and layoffs.
When asked what this would mean for the country’s financial state, Huggins predicts a riot, while Booth simply says, “disaster.”