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H. Stavrinides | Is the return to the drachma the solution for Greece?

H. Stavrinides | Is the return to the drachma the solution for Greece?

Despite the fact that Greece has reached an agreement on a new memorandum of understanding (MoU) for another loan package, the government has resigned. This was due to its internal ideology split where on the one side we observe the ones in favor of the MoU or better call them the realists, and on the other side the anti MoU ones or the so called idealists. The first group chooses the euro since they do not see any alternative, and the second one prefers an exit from the euro and a return to the drachma.

Is it indeed a realistic option the return to the drachma and tearing of the memoranda? Has this alternative been evaluated and analyzed and if so, what impact would such a decision have on the country and its citizens?

Debt Write Off: An important argument for a return to the drachma would be the default and thus writing off the unbearable Greek public debt. Unfortunately things are not that simple because several loan agreements signed by Greece are governed by English law which in simple terms allows lenders to reclaim their money even after a default. An example of this was the case of several USA investment funds that forced Argentina to compensate them even after a default when they won the case in the courts.

Fiscal Sovereignty: The second argument is that of the recovery of fiscal sovereignty, since Greece will be able to issue its own currency, and this will allow it to decide on salaries, pensions, surpluses or deficits in its budget and will therefore give people economic breathing space and better incomes. Unfortunately this is also not expected to be achieved and the reason why is answered when we have a look at the recent past when Greece was on the drachma. Waste of public money, bribes and squandering of national wealth, lack of meritocracy, anti productive public sector, to name just a few. So the moral hazard for Greece to slip back to this evil path is very high. Not even the absolutely necessary reforms will be made since political parties will view that costs of such reforms will always outweigh the benefits (in political terms).

Currency devaluation and return to Growth: The next argument claims that since the country would devalue its currency this will make the tourism sector more attractive and thus the number of tourists will increase and hence more jobs will be created and finally growth will come. Indeed the argument is valid but is one sided and only takes into consideration the exports side of the equation. What about all the goods that the country would need to import that will become more expensive from the huge devaluation in the national currency? Greece is a net importing country and therefore inflation is expected to soar into double digit figures and making most products inaccessible to many people. Also do not forget that despite the internal devaluation, i.e. the decrease of labor costs within the euro by 40%, the country did not manage to become competitive. Such competitiveness will be achieved when the country returns to the drachma? We strongly doubt it. The problem with Greece is more than clear that it is not monetary but a structural one.

Controlled Currency Devaluation: This argument is completely false since in order to control the devaluation of a currency you must have foreign currency reserves. This way you intervene in currency markets by selling the foreign currency reserves and buying drachmas in order to support it. Greece does not have this capability, so until it becomes able to, the drachma will be in a free fall.

Redistribution of Wealth: The worst argument is that the return to its own currency the country  would be able to protect the poor, the middle and low social classes. The 40 billion euros that left from the Greek banks in the last 7 months and the 80 billion that fled in the previous years, will return to buy for peanuts whatever will be left for sale. The devaluation of the drachma will give the opportunity to this oligarchy to gather what assets are left in the middle and low class wiping them out from the social map. The redistribution of wealth from the poor to the oligarchs will be unprecedented.

Haris Stavrinides
Fund Manager and Financial Analyst at: OSYS Global Diversified Investment Fund (OGDIF)