Can the Greeks Pay Their Debts with Drachmas?

Nearly three years ago we posed the question, How Many Drachmas to the Dollar? This was at the previous height of the Greek debt crisis when one option for Greece was to leave the EU and print its own money.

Things seem to have gone from bad to worse in Greece and the contagion of debt default worry seems ready to spread across Europe and elsewhere. It appears as through the Greek debt write off requirements were too strict. At least that is what Greek voters believe as they voted for widely different political parties and not so much for the folks that negotiated the debt relief deal that was supposed to protect against debt default. It turns out that Greece was not alone having this opinion. France elected a socialist who thinks that too much fiscal restraint will drive France and Europe into a recession and worsen its debt dilemma instead of improving it. At this point Forex traders may be thinking that the germane question really is how many Drachmas to a dollar.

We might just as well have written this last week with the addendum that the Greeks have voted and elected a prime minister who is demanding that the debt burden be reduced as in letting Greece write down its debts. The question at the end of this story is, can the Greeks pay their debts with drachmas?

No One Is Happy about This

The international business section of The New York Times reports how the meeting over Greek debt ended badly.

A meeting of Eurozone finance ministers on Greece’s debt crisis broke up in acrimony on Monday evening, further dimming hopes of a speedy resolution to problems that could result in the new Greek government soon running out of money.

Just before the meeting ended, a Greek official dismissed the latest proposal by its European creditors as “unreasonable and unacceptable.” The proposal had called for Greece to abide by the current terms of its bailout program.

Greek officials have been seeking to revise or scrap the current bailout plan to allow them more flexibility in their budgeting plans.

The insistence on holding Greece to its prior commitments showed the Eurozone ministers were “wasting their time,” wrote the official, who under government policy could not be identified by name.

The day did not start out well. Greek and German officials traded public barbs, and nervous investors sold off Greek stocks and bonds.

The problem for the Eurozone is that the Greek people elected a person who basically said that enough is enough and sent him to the center of the EU to negotiate a debt write off. The problem for the Greeks is that politicians, especially German politicians do not want to be voted out of office which is what they think will happen if they are seen as soft on the lazy Greeks who owe them money. And if not deal is reached can the Greeks pay their debts with drachmas?

Paying Debts with Drachmas

The Financial Post writes about drachma diplomacy. The issue is whether it will be better for Greece outside of the EU.

A Greek exit may start not with boisterous rallies in Syntagma Square, but quietly, in the dead of an Athenian night.

If Greece’s ruling Syriza Party and its partners were to make that momentous decision, Greek banks would clandestinely get word the country is abandoning the Eurozone and switching back to its own ancient currency. From there, the coordinated distribution of drachmas would begin.

“They’d have all the bills printed up,” said an expert. “They’d be waiting in a bunch of dump trucks.”

If Greece switches currency, any euros left in Greek bank accounts would be converted to drachmas – which would cost account holders dearly, as analysts estimate the drachma would depreciate by 50% to 60% in a matter of days.

Can the Greeks pay their debts with drachmas? They will be able to do this only if their creditors are willing to take a write off more substantial than the one the Greece is trying to negotiate. If this happens the drachma falls hugely in value and foreigners swoop in to buy Greek property and the European Central Banks licks its wounds.