Greece Exit Scenario

Treaty-wise, Greece could not be expelled as a member of EU but what would exactly happen if Greece exits the EURO?

A  Banking holiday (forced shut down of banks) will be declared and EURO will be converted to DRACHMA. They will set a conversion rate; let’s assume its 1 EURO for every 1 Drachma.

Market forces will then decide what would be the value of the DRACHMA. Just like stocks, supply and demand govern currency. The more Drachma supply the lesser the value since it will exceed demand. Nobody knows by exactly what amount the Drachma shall be depreciated against the EURO but let’s just say its 2 Drachma for every 1 Euro or a depreciation of 50%. The depreciation would cause their standard of living to diminish since their buying power is cut into half.

The depreciation of their currency would benefit them by making their tourism and export industry attractive and they are on their way to economic recovery.

Sounds good? But it’s not that easy.

Before the banking holiday will be declared it would be logical for the Greeks to withdraw their life’s savings from the bank to protect it from being converted to Drachma. This action of the citizenry would cause theirbanking system to collapse. Euro has more buying power than the Drachma then it would just be wise to hold on Euro and keep it in their safe or under their pillow.

It’s sounds so easy to print and pay obligations but it’s not that easy either. With a depreciated Drachma, they needed to print more money to pay their obligations depleting their cash. Why not print and print? Then that would render their Drachma next to worthless.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s