How Many Drachmas to a Dollar?

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? The situation is Greece is as follows:

Greece is a parliamentary democracy. It has many political parties with widely different views. For a party to govern it needs to get a majority of the vote. If it fails to do so the leading vote getter is asked to try to form a coalition with another party or two. This usually is a matter of picking a party or two with fairly close views on how to govern. Then the parties in the coalition pick a Prime Minister everyone gets a say in how things will be run. Unfortunately for Greece the major parties lost a lot of votes in the most recent election and parties on the far right and far left gained strength. To avoid a Greek debt default these parties need to agree to form a government that can go ahead with the agreed upon requirements of a EU sponsored bailout by the middle of June. If they do not, there will an election later in the month, too late deal with the issue. The next thirty billion or so (in dollars) installment is necessary to pay off bonds that are coming due. If they are not paid off the likely outcome will be a run on banks in Greece and the exit of Greece from the EU. Then, how many Drachmas to a dollar will be a valid question.

Besides wondering just how many Drachmas to a dollar, traders are driving the Euro down in expectation of an exit of Greece from the EU and the loss of loans made by the EU to Greece. The question of how many Drachmas to a dollar will be a side issue if Italy is next to default and the Euro goes into free fall. Underlying this drama is the question of whether the strict austerity measures chosen as a route to solvency are too strict. If these measures serve to choke off growth they will defeat their purpose. Voters in two countries have voted strongly for growth. If that is the way things go Greece could default, leave the EU, reestablish economic growth and the answer to how many Drachmas to a dollar might that the Drachmas is increasing in value. For the EU and the Euro the problem is that a Greek default will threaten other economies and require that the EU print more Euros in further enlarge its bailout fund. That will likely drive the Euro further down. That is part of why we post the question how many Drachmas to a dollar instead of to a Euro as the Euro will likely fall either way. Options on the falling Euro may well be the best choice in hedging risk as this situation plays itself out.