Letting Greece Go Its Own Way and Trading Drachmas

A possible end result of the ongoing Greek debt crisis would be letting Greece go its own way. Greece would leave the European Union and revert to its old currency, the Drachma. Our interest in this regard is if there would be a profit in trading Drachmas versus the Euro, dollar or Yen. First of all what is the current situation? The Financial Post believes that Greece is on a collision course with the EU and that things will not get better.

Greek aid talks in Brussels ended abruptly Monday as an official from Prime Minister Alexis Tsipras’s government said the euro area’s proposal to extend existing bailout commitments was “absurd” and “unacceptable.”

Officials are trying to agree on a program of financial support to keep Greece afloat beyond the end of the month when its existing program expires. Without a deal, Greece could run out of money by the end of March, forcing Tsipras to consider leaving the euro or abandoning his promises to the electorate.

The current Greece prime minister was elected on the promise to renegotiate the Greek debt which is nearly twice the size of the gross domestic product of the nation at about €176 billion. If he cannot get what he and the Greek people consider a reasonable solution the sovereign nation of Greece could simply leave the EU, convert its currency to drachmas and go it alone. What would happen then?

How Many Drachmas to One Euro?

If talks do not work out letting Greece go its own way may the next stage. The New York Sun speculates on a return of the drachma. According to the Sun, economist David Malpass

- reckons an exit is “increasingly likely once Greece’s flow of euros dries up in late February.” France, Spain, and Italy are less indulgent; America is “more neutral now, needing German help in other areas.” Greek debt has been “migrated” from Eurozone banks. Those and a few other factors add up, Mr. Malpass reckons, to the return of the drachma.

What Mr. Malpass foresees is that as cash runs out the Syriza government “will be faced with the decision to submit to the IMF or begin paying its bills in drachma.” He trans-supposes that the new premier, Alexis Tsipras, “will probably be unable to agree to Europe’s terms.” So he will opt for “drachmization,” the impact of which will, Mr. Malpass reckons, depend “on how Greece limits government spending and how it handles contract law issues.”

Basically the question in Greece is if local loans taken out in Euros will be payable in increasingly devaluated Drachmas. This is an issue of net Greek wealth. The basic assumption is that the Drachma will go down by two thirds in a few weeks after it is introduced. Trading Drachmas will largely be a matter of shorting the currency as it devalues and the only question will how bad it can get.

Picking Up Greek Assets and Cheap Drachmas

If Greece goes its own way trading Drachmas might be a way to get into the Greek economy for cheap, purchase property, and wait for things to correct themselves.

Whatever It Takes

Considering the chaos that would ensue if Greece leaves the EU and the Euro how will this work out? BBC Business quotes the Greek finance minister as saying that Greece will do whatever it takes to come to an agreement.

Mr Varoufakis was speaking after talks with EU finance ministers broke down earlier than expected, with Greece describing the EU’s offer as “absurd”.

“I have no doubt that there is going to be a agreement in the end which will be very therapeutic for Greece,” he said.

Greece wants the conditions of its €240bn (£178bn) bailout restructured.

Because of the substantial disagreement between Greece and the rest of the EU it may take a lot of work to avoid letting Greece go its own way and trading the Drachma as a result.