WASHINGTON – With each day, the likelihood is growing that Greece’s financial catastrophe will force it out of the euro currency alliance and compel it to restore its old currency, the drachma.
It won’t be simple.
Even in a computer age, issuing a new national currency is a complex logistical task involving equal parts digital commands and manual labour.
Greece would have to reprogram banks’ computers to make the switch out of euros, the currency it’s used since 2002. Then it would need to design, print and distribute new bills. That process would likely take at least six months.
In the meantime, Greeks would have to use leftover euros and possibly IOUs issued by their government.
Then there’s the challenge of persuading people to actually use a new currency printed by a government that can’t pay its bills, especially when euros are still available. The new Greek currency would almost certainly plummet against the euro soon after it was issued.
“They would be trying to do something for which there is no precedent,” says Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics. “They would be trying to introduce a national currency while the existing national currency — the euro — is still in circulation.”
Greece has already defaulted on its debts to the International Monetary Fund and is locked in contentious talks with its European creditors for new financing. Without a deal, Greece could become the first country to be pushed out of the 19-member eurozone.
Greek banks have been closed for more than a week. ATM withdrawals have been limited to 60 euros ($67) a day to keep panicky depositors from draining their accounts and the banks.
Greece would hardly be the first modern nation to have to create — or re-create — a currency.
When the Austro-Hungarian empire broke up after World War I, the five countries that emerged from the rubble stamped their own imprimatur over old imperial notes. Later, they adopted new currencies. For some, the transition fueled runaway inflation.
The Slovaks had better luck when they introduced a currency in 1993 after breaking up with the Czechs (though Slovakia eventually adopted the euro).
But the Greeks would likely find the process far more difficult and painful because their country’s financial crisis is so dire, its economic outlook so bleak.
As a first step toward a currency breakaway or even just as a stop-gap measure, the Greek government could start issuing IOUs within the next few days or weeks. That’s especially likely if the European Central Bank cuts off its financial lifeline to Greek banks and they run out of money.
IOUs worked for California during a state budget standoff in 2009. But California was widely expected to eventually pay its debts and redeem the IOUs. And it did.
The outlook for Greece is much less certain. Analysts at Societe Generale suggest that, as a sweetener, Greece might offer a tax break to people who use IOUs.
Earlier this month, Peterson’s Joseph Gagnon laid out the steps involved in issuing a new version of the drachma: Greece would first pass a law converting financial assets, debts, contracts and wage agreements from euros to drachmas. Banks would have a few days to reprogram their computers.
Then Greece would have to start producing a new currency.
The Bank of Greece, which operates a printing press in an Athens suburb, has been producing euro notes and coins. It might be put to work to generate a new drachma.
During a flare-up in the Greek debt crisis three years ago, shares of the British banknote manufacturer De La Rue rose on speculation that it would land business producing drachmas. Da La Rue, which printed new Iraqi notes after the fall of Saddam Hussein, has declined to comment on whether it might be involved in a new Greek currency.
In the company’s in-house magazine, De La Rue manager Gregor Ross described how it produced a currency for the new country of South Sudan in 2011:
“The first stage involved getting the designs right — not just in terms of visually encapsulating a sense of a new nation, but in terms of putting together the most appropriate mix of security and anti-counterfeiting features for the region.”
The company delivered the new currency under strict secrecy in six months.
A new drachma would likely debut at a 1-to-1 value with the euro — and soon go into freefall. Over time, though, a shrunken drachma could gradually help rejuvenate the Greek economy because it would make Greek goods less expensive overseas and draw bargain-hunting tourists to Athens and the Greek islands.
But for a while, the pain would be severe. Greek businesses and consumers who had borrowed from foreign lenders in euros would struggle to accumulate enough shaky drachmas to make loan payments. Many would go bust.
And the new currency would struggle to find acceptance in the marketplace.
“There would be a competition in Greece between the euro and drachma,” Kirkegaard says. “The government could impose drachmas on retirees and others — the poorest in society. Those with access to euros, they’d be just fine.”
But “anyone who had drachmas shoved down their throat, so to speak, would do everything they could to get rid of them,” Kirkegaard says.
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