How and why Greece would leave the Euro (part 3)

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How and why Greece would leave the Euro (part 3)발음듣기

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Now that we have a reasonable understanding of why austerity is very difficult.발음듣기

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1) There probably isn't the political will to do it.발음듣기

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And even more, it might drive Greece into a bigger recession.발음듣기

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And we also understand why defaulting isn't an option for Greece and we understand what a monetarily independent Greece would have done.발음듣기

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We can now get a good sense of what Greece is likely to do, outside any other intervention, outside any help from other Euro Zone members.발음듣기

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In future videos, we will talk about why other Euro Zone members do have some incentive to try and stop Greece from doing what I'm about to articulate.발음듣기

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So in an ideal world, Greece, if it had its own currency, would just print away and be able to inflate away its obligations.발음듣기

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Also, if it had its own currency, and this is not necessarily a good thing to do, because it will undermine investor trust going forward, but even defaulting would be an option, because they would still have access to their own currency and then they could just keep printing and then lending to that government, then the government could continue to pay the nominal obligations, but since they're getting inflated away, in real terms they would become lower and lower.발음듣기

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So what Greece, if it doesn't get any help from other Euro Zone members, if it does not get bailed out in some way, what is likely to happen is that Greece leaves the Euro.발음듣기

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And the actual mechanics of that, and it will probably go back to a new form of the drachma.발음듣기

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And the way that that would actually happen mechanically is that they would declare a banking holiday.발음듣기

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And it sounds like a very nice thing like everything which had a world "holiday" in it but a banking holiday is essentially a forced shut down of all of the banks for some period of time, over which they can do transition into the new currency.발음듣기

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And so, entering into the banking holiday the Euro was the currency, and the money you had in your bank was denominated in Euro, but exiting the banking holiday the drachma will be the currency, and the money that you have in the bank will be the drachma.발음듣기

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And what the government will essentially do is set some type of conversion rate over that banking holiday.발음듣기

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They'll maybe say every one Euro you have will be converted into one drachma.발음듣기

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And then just the exchange markets will determine what the actual exchange between a euro and a drachma is going forward.발음듣기

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And so then everybody would buy and sell in drachma.발음듣기

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And the government would also say all of our obligations are now in drachma.발음듣기

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Which would essentially be a default because if they told to their debtors that "we no longer owe you....[where is the number?] 356 billion euros", or actually close to 400 billion or whatever the number is, "we do not longer owe you 400 billion euros, they are now going to say we owe you 400 billion drachma."발음듣기

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Or they can even say, we're only going to pay you 200 billion drachma, or a 100 billion drachma.발음듣기

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But no matter what they say, even if they say they are going to give you a trillion drachma, that would still be a default on the debt because these debtors, in order to fulfill these obligations, they were expecting euro.발음듣기

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And if you give them anything other than euro, if you give them strawberries or bananas or drachma, that is a default.발음듣기

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So no matter how many drachma they say they're going to give, this would constitute a default on their debt.발음듣기

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But the Greek people could actually then move on with their lives.발음듣기

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And there's all sorts of crazy things that would happen, but at least now the government would be able to print its own money and use it to buy government debt, and continue to fund government spending and eventually inflate away its obligations.발음듣기

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You could imagine a situation that, right now, its real GDP is, let's say it's the equivalent of 100 drachma.발음듣기

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And then by just keep printing drachma, the actual productivity of the economy doesn't change.발음듣기

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It actually might improve if money is printed, but you don't get to hyper inflation.발음듣기

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Let's say over the next 10 years that the real GDP doesn't change, but the nominal GDP, due to inflation over the next 10 years, becomes 500.발음듣기

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Prices in general, ...so inflation, you had 5x inflation.발음듣기

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Things become worth 5 times as much, you produce the same goods and services, they are now worth 5x as much.발음듣기

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But now, that debt that you have, your taxes are going to grow with inflation because they are a % of your GDP but your actual debt obligations won't change.발음듣기

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So in real terms, they'll be 1/5 as much, which all of a sudden, makes them sustainable.발음듣기

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Now, as I said, this is not a simple thing to do.발음듣기

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And not a painless to do.발음듣기

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And we haven't even started talking about the repercussions for the rest of Europe, and why this might be scary, and make other people suspicious of countries like Spain and Italy, etc.발음듣기

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And even in Greece this would be painful.발음듣기

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Because you can imagine, you can imagine, we're already starting to see this in May of 2012.발음듣기

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The government will say every euro in your bank account will now be a drachma, but the people there they know better than just believing that a drachma is going to be worth the same as a euro.발음듣기

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They're going to know that as soon as the drachma starts exchanging on foreign exchange markets, that the actual reality is 1 drachma is going to be worth something closer to maybe .6 of a euro.발음듣기

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Or .7 of a euro.발음듣기

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Let's say it's .7 of a euro.발음듣기

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So essentially by this happening, everyone's savings and deposits, in real terms, in terms of their global buying power is going to go down by 30% overnight.발음듣기

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And the Greek people are already seeing that.발음듣기

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They are seeing the possibility of a banking holiday, and a conversion to the drachma.발음듣기

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And so that's why you have people waiting in line before this happens and trying to withdraw their euros.발음듣기

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So people are starting to withdraw their euros, and if they have a Swiss bank account they can deposit it there or they can just take the euros and stash in their mattresses.발음듣기

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And that by itself is a little bit scary.발음듣기

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The bank's deposits are depleted.발음듣기

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But remember, they have a fractional reserve banking system.발음듣기

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They do not expect everyone to show up on one day and expect all of their deposits to be accessible.발음듣기

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So this is essentially going to lead to a run on banks.발음듣기

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And you're already starting to see this in Greece, and it is actually rational behavior.발음듣기

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If you think that 30% of your savings is about to swiped away because of this thing right here, I'm going to give you .7 of a euro for every euro you have, you would rationally go to the bank and get your deposit back.발음듣기

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But because everyone is going to start doing that, the banks won't have their reserves.발음듣기

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The Greeks don't have their own central bank that can back up the banking system there.발음듣기

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So this might lead to massive bank failures.발음듣기

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And essentially, the entire Greek banking sector could go down because of this.발음듣기

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And they don't have an independent central bank, independent of the European central bank, to kind of fight the fires the way that the Fed would in the US.발음듣기

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So this is not a clean situation; it is not a painless situation.발음듣기

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But, outside any help, it seems like the only option that Greece has at this point.발음듣기

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