Friday, 2 March 2012

Do The Greeks Have a Choice?

Everybody's favourite European country has an agonising choice. It isn't anything new as you read about everyday in newspapers ranging from the FT to the Daily Star.....Either Greece accepts the harsh tonic that the ECB demand or they renege on their debt and leave the Eurozone altogether and take on the Drachma.

Of course there are sound arguments for both. Staying in the Eurozone guarantees them access to capital markets that (let's be honest) are sorely needed. Defaulting on the debt would antagonize its trading allies and the financial institutions that buy the debt in good faith. Plus if you are already running a budget deficit and need to plug holes in your leaky economy, you are going to have to print money and we all know where that leads right Weimar Republicans? (aka inflation)

If they did default, would it be that bad? The drachma would surely be devalued giving them a greater competitive advantage and a chance to kick-start their economy (primarily their tourism economy), while the Central bank gain autonomy over their monetary policy, allowing them to further fine tune the economy....

Problem is that we all assume that the currency would be freely tradable; that you can go to a Travelex and change your $/£/Eurs for Drachma but who in their right mind would agree (even at favourable rates) to take stock of a currency that is so volatile you could lose 5 - 10% of your money in a week. Furthermore, if hyperinflation takes hold the situation would be even worse.

So there you go, the populous is forced to trade in drachmas but when the Greek grocery store wants to stock up on M and M's, how is it going to pay Nestle for the sweets? It can't convert its drachma's into anything other currency so it can't have any M and M's.....

Fair enough, there will always be someone that would take the risk at the right price but taking on the drachma could well mean the end of foreign supply of goods, at least in the near term.

Greece with no M and Ms? I sure hope not

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