How to Grexit gracefully

President Merkin Muffley: How is it possible for this thing to be triggered automatically and at the same time impossible to untrigger? 

Dr. Strangelove: Mr. President, it is not only possible, it is essential. That is the whole idea of this machine, you know. Deterrence is the art of producing in the mind of the enemy… the FEAR to attack. And so, because of the automated and irrevocable decision-making process which rules out human meddling, the Doomsday machine is terrifying and simple to understand… and completely credible and convincing.

Dr. Strangelove (1964)

As Greeks come to terms of the full impact the financial waterboarding inflicted on Tsipras this week-end by his European partners, it is clear, there will be only one credible outcome.

First, this agreement will force Tsipras to agree to a compromise of conceding ever more sovereignty. Being in charge of Greece will now be handed to the spineless Eurogroup psychopaths headed by the devious and crazy Dr. Strangelove of German politics, the chief designer of the Euro doomsday machine: Dr. Wolfgang Schaeuble. His view is that you have to scare the rest of the eurozone into submission by German rule. Slapping about the Greeks does not only do that, but also goes down well in the tabloid press in the Vaterland.

Schaeuble, has a 70% approval rating in Germany, that was before the week-end. We will see whether his actions will have improved that score.

But: How easy is it to have the Greeks fully committed to this agreement? What will Mr Tsipras’ wife think, who, as we know, does not like a coward as a husband, who brings back agreements which entrench further austerity. Let alone the Greek parliament, which still has to vote on it. What will the Greeks themselves think, will they agree? A referendum, anyone? We have not had one for a week or so. Let’s vote on it!

Therefore, that current mess can only result in one credible outcome, ultimately, Grexit.

So Grexit looks more and more likely.

However, the term Grexit is notoriously imprecise, and therefore we want to clarify it further, as there are three versions of the Grexit available here.

First, the Argentinian Tango: Grexit and Devaluation

Passion, drama, melancholy

This Argentinian version of default is well known and often recommended. Like its better known cousin, the Brazilian, it involves severe haircuts. After the introduction of the Drachma and then a devaluation, these losses often fall on the poorest member of society, while the rich, having rescued their money abroad, will now be laughing. The macro-economic impact of introducing a new currency are severe. We have highlighted the problems with this approach previously, and have summarized it in one word: disaster. But just to re-cap, after a drop of GDP of 25%, GDP would now fall further, the Greek currency would devalue to 50% of its value, more pain, but possibly some gain in 1 or 2 years time, as it will now be easier, with increasing exports, to earn money abroad.

Which is nice, earning money abroad, that is what Germany does, after all. But, having already a balanced current account, Greece does not need to earn money abroad..

Even less of a need now, that no primary surpluses to repay debt have to be achieved, following a default. Leaving the Europeans licking their wounds and trying to make up for a Euro 440bn loss (320bn loans, 120bn Target2 liabilities) which the biggest hole ever created by an insolvency ever anywhere in the world.

Only the Germans are stupid enough to do so – export like mad – running huge positive current account balances. These assets abroad, as the Greek Argentinian Tango and the subsequent loss of 80bn of this accumulated surplus (Germany’s share of the 440bn debacle) will demonstrate to the Germans, are not worth anything. Better to have a balanced current account. Always.

Second, Zorba, the Greek: A proud Drachma 1:1 against the Euro.

A slow start, followed by ever quicker movements

The national dance of Greece is one of the options. Greece could legitimately say, listen up, Europeans, you guys crashing our banks has made it pretty impossible for our economy to recover. Even if the occupying forces of Troika were to retreat. So we are going to get our independence back. We will have a Drachma, and we will default. Sorry about your 440bn, but we cannot pay.

Now, everybody in the world will think that the Drachma will quickly devalue, the economy is pretty dire, after all. So again, the rest of Europe will expect a 440bn write-off and Greece should definitely not repay a cent.

On the other hand, having gained back independence by gaining control over its central bank, Greece could print all the money it wanted to get Greeks back to work. Positive Money could be put in, lowering unemployment and allowing the Greek left-wing government to pursue left-wing policies.

So could the exchange rate be held at a level of 1:1 against the Euro? There is no reason for the Greek Drachma to fall. Even printing money would not cause inflation, the Greek economy has plenty of spare capacity, before inflation will start. The Greek Drachma could just stay at the level of 1:1 against the Euro, with the new currency only available for purchase at the Greek Central Bank. So that speculators could not play around with it.

Another way the value could be assured is to run the current account at a very small positive balance. Export just a bit more than you import, always. That would assure that Greece has no need of foreign currency loans, and could therefore be saved from attacks by speculators.

It would probably be safe to have some kind of fall back arrangement, if things turn sour. Like an overdraft from the US, China or Russia. They do not have to use it, the Greeks, but just in case.

Would it work? Clearly, there will be huge scepticism, that Greece will be able to hold the Drachma exchange rate level against the Euro. But as time goes by, Greeks will become more and more convinced that this is actually a credible way forward. They will invest in the country again, and as more will do it, the quicker the steps to growth will become, just as they are with the Greek dance.

But, and that is a major drawback with each of the two options above, unless you have new notes to hand out, there will be no new currency. Designing and printing them will take at least a year. So the above dances, introducing the Drachma, will effectively have to be put on hold. These Grexit options are just not credible in the short term.

That really only leaves one further option.

Thirdly, the Soft Shoe shuffle: The Montenegro option

Sneaking out of the Eurozone, without anyone noticing

Greeks like the Euro. The other options of Drachma, the Argentinian Tango, or the Zorba the Greek dance, are clearly not a desired outcome. Otherwise the Greek prime minister would not subject himself to being “crucified”, as the FT put it today, at the hands of its European “partners”.

Montenegro, a little Balkan country some 100 miles north of Greece, also likes the Euro. It uses the Euro as its currency without the authority of the ECB. The Montenegrins just have enough notes (probably brought back from working abroad – and bought at currency exchanges) to use it as their currency. That is because to everyone in Montenegro it seems a safer bet to hold on to a strong currency rather than issue its own. It puts a certain discipline into the Montenegrin government as their is no option to devalue. Montenegro has to stay competitive. And its people like it that way. Because the Montenegrin government has to be more careful, locals leave their Euro money in the local banks. In stark contrast to Greece, which has seen enormous capital flight by its citizens.

So how is the Montenegrin arrangement different from the option which Greece adopted when it officially joined the Euro? Well, any foreign lender who excessively lends to Montenegro will know, that unless the country has enough Euro or foreign currency it will default. So that is one thing they look at, the budget deficit. Lenders would also look how much Euro does it have to pay for its import bills. Nobody will ever bail it out. The bankers’ loans to the country will be lost. So banks are a lot more cautious.

When irresponsible banks lent to Greece, they knew that that would not be the case. Greek banks could borrow form the ECB, if they looked like they needed help. Huge import bills were thought to be irrelevant, as was the loss of competitiveness compared to the rest of Europe. Lenders also knew that if Greece defaulted that would have repercussions for the whole of the eurogroup, and hence they lend as much as they could get away with, leading eventually to the Greek bail-out, allowing some of the creditors to be bought out by the European taxpayer.

So really, Greece should probably all the time have had an arrangement similar to Montenegro. Use the Euro, but not join. It would not now have the huge debts it cannot repay, its banks would not owe tens of billions to the ECB, its citizens would have had more confidence in their own banking sector. The economy would not have over-heated.

Now, it is not too late, and as Yanis Varoufakis told us today, Greece almost sneaked out of the Eurozone two weeks ago. He was planning to take the Greek Central Bank under Greek government control following the decision to have the referendum. That would have effectively created a situation, where Greece, like Montenegro, would have used the Euro without permission. Greece would have soft shoe shuffled out of the Euro, into a Grexit where the Euro would still be its currency.

In the 6 person Greek government crisis cabinet, the option was seriously considered. 2 voted for such a proposal and 4 against. Mr Tsipras, we can assume, wanted a compromise, and voted down the proposal. If he had voted for, perhaps Greece would already have left the eurozone straight-jacket.

Surely, following the negotiations on the week-end Tsipras must now wondering whether he should not have voted for the Montenegrin option, when it was available. That option could still be on the table at any time the Greeks decide.

My recommendation would be to do what Varoufakis always wanted. Sneak out of the Eurozone, and have your own central bank run the show in Greece, while subjecting yourself to the market discipline which the Euro brings. Everybody would be happy.

A win-win-win again:

Schaeuble because Greeks are out of the Euro, Greek voters because they still have the Euro, the Greek government because it could regain its sovereignty.

That would leave Greece to run its own policies, its own central bank, keep hold of its assets, grow its economy, and put a moratorium on its debt. Ok, it takes a bit of guts to take that step and last time Tsipras chickened out.

Still, he can always opt for that last dance, whenever he likes. A shuffled Grexit would be the best option as the Euro could be kept as the currency.

Mr Tsipras will have to decide. I think I know what Mrs Tsipras would recommend.


8 thoughts on “How to Grexit gracefully

  1. Tsipras is a chicken, a radical chicken, he could have destroyed Germany and EU from the inside but he retreated, he should see who that damn Che Guevera -that reporters say its hanging in the walls of Syriza MPs- was, a soulless guerrilla fighter and Minister of Finances of Fidel Castro who didn’t fear to drop dollar and start playing edgy economics with alternative economies… Cuba is still there and recently, even thriving… Or… maybe Tsipras wife will do the sneaking out with all the money from the third bail-out?, if she does that, I wont’ think Tsipras is a chicken.


  2. The problem is that the ultimate goal of globalists is the equalization of the standard of living between the rich and poor countries. Since there are far fewer rich countries, their standard of living must fall precipitously while that of the poor countries will rise a little. So since radical leftists are actually just radical globalists (and hate the nation state) of course Syriza would reject ‘bourgeois nationalist” solutions such as currency sovereignty.

    So I am sure that Tsipras’ wife is very happy that Greece’s poor are that much closer to an African standard of living. According to left globalists, evil Europeans owe their wealth to racism and colonialism so extreme austerity is the only answer to White Privilege.

    The moral of this tale is that if working class Europeans want to see their standard of living rise, they need to vote for nationalist / socialist parties like the Front National in France.


  3. This “do a Montenegro” idea has been on my mind since 2011, but on money matters I’m a dunce so I couldn’t ever say how it work. I have suggested it in a couple places, but never had a response from anyone. It’s late here so I will look at this tomorrow.

    Another idea I had was for Germany to leave the EMU and revert to the Deutschmark. The Euro would be pegged to the DM – maybe a ‘crawling peg’. It should be easier for the rest to better align their economies with the elephant out of the room. Disclaimer : no disrespect intended for Greece, Germany etc.


    • Right Paddock:

      I am also a dunce for not reading Matt’s article properly the first time. Your comment brought this back to my attention. Many thanks.

      Again Matt is spot on. This sort of solution was not fully explored in the past. It is half of one and half of the other, so to speak. To frame it as the “Montenegro” solution is brilliant. Already this idea is working in practice, so it is nearly impossible for the doomsayers to claim that it would not work.

      May I be so bold to point you in the direction of two excellent websites on currency theory and monetary reform:

      I see Matt already knows about the first one.

      I am also not an expert in these sort of matters, but I continue to support any creative idea that would end or at least mitigate the crisis that Greece (and Europe, for that matter) is in.


  4. I rather suspect that to ‘do a Montenegro’ Greece would have the exit the EU.

    I presume it’s because Montenegro doesn’t actually create any new Euro that it doesn’t need permission from the ECB to use the Euro as its currency, Any more than Zimbabwe needs permission from the SA Reserve bank to use the SA Rand.

    One effect of a GREUxit would be no more access to EU structural funds such as CAP subsidies, That would go down like a lead balloon in certain Greek quarters.


    • If Montenegor expands it money-supply, because there is an increase in bank loans in the country, it effectively creates Euro, although only euro in its bank accounts. The difference is that Montenegro is so small, no one cares.

      But, you are right, an exclusion from the EU is probably something which would happen, to discourage others. So no more structural funds from EU, no more Agricultural funds, probably in total 5-6bn coming into the economy. On the other hand, if these funds would actually be useful, the projects being financed by them should be able to be financed by bank loans. If a road is useful, it should be build, whether EU funding is available or not. So if useful, it will be build with bank loans.

      In fact, lots of useless funding will lead to misallocation of resources. If Olive growers with 5 olive trees get 5000 Euro subsidy per year, and do not have to work because of that, then it would arguably be better to cut the 5000 Euro subsidy, and allow the “farmer” a proper job. Which are not there at the moment, but which will come back if Troika leaves.


    • apparently, there is no legal view what would happen, if exit from eurozone.

      So even though EU would not like it, if there was a “Montenegrin exit”, Greece would continue in the EU and presumably continue to receive funds from the agricultural fund/structural fund.

      I just fund that somehwere else:

      By the way, here is the abstract of the ECB’s document.

      ECB, Legal Working Paper Series, No 10 / December 2009

      “Withdrawal and Expulsion from the EU and EMU; some Reflections”

      This paper examines the issues of secession and expulsion from the European Union (EU) and Economic and Monetary Union (EMU). It concludes that negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty, and that unilateral withdrawal would undoubtedly be legally controversial; that, while permissible, a recently enacted exit clause is, prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective; that a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible. This paper concludes with a reminder that while, institutionally, a Member State’s membership of the euro area would not survive the discontinuation of its membership of the EU, the same need not be true of the former Member State’s use of the euro.


  5. Yeah, my thoughts are similar. Existing Euros in Greece are a liability of the Eurosystem to individual depositors, and they don’t need to change. People can keep their Euro notes and Euro accounts.

    Let the Greek state issue Drachmas in addition, or to replace Euros that are haircut by the ECB’s predatory action. Euros and Drachmas can co-exist.

    I do think drachmas have to devalue though to shift consumption patterns from imports to domestic goods (or to give people a stronger incentive to become hoteliers who earn Euros rather than lawyers who earn drachmas).


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