In 2010 Anglo Irish Bank needed 30b in cash, to pay deposits and bonds. The Irish government hadnt got that on hand. In fact, it was out of any sort of then acceptable collateral. So, it wrote an IOU to Anglo, saying “we’re good for this”. They then took this to the Central Bank of Ireland, swapping a promissory note for actual cash via ELA.
Greece has now been told that its available collateral notwithstanding the ECB will maintain ELA funding at what it was. With deposits flowing out at a rate of 1b plus per day this clearly puts the screws bigtime on the Greek government.
The ECB allowed this Irish monetary sleight of hand. Things, not least tempers and mood, are different with greece but there is at least a possibility that they might so allow. At the least Greece could argue that as was treated Ireland so should they be.
These prom notes dont last – the ECB required them to be extinguished, quite smartish, but as a means of getting over a liquidity hump, and that is where Greece is at now, they are worth considering.
This paper studies the role of exit from a monetary union during a debt crisis. A monetary union, such as the European Monetary Union, needs to establish a procedure for exit as a tool to cope with debt default. The paper studies various forms of exit and argues that “Euroization” is both a credible and effective means of punishment for countries in default.
Today the Eurozone faces financial and economic problems that, if left untended, threaten the fate of the EU itself. Several paths lay open to European leaders: deeper integration, more piecemeal crisis resolution, or a possible exit from the Euro of one or more countries. Yet there are few historical examples of a currency union break-up that we can use to understand implications of the third option. This essay draws lessons from the collapse of the Habsburg Empire after World War I-the best historical case study of a disintegrating currency union-for the Eurozone. The creation of new national currencies in Central Europe in the 1920s came at a very high cost, took years to stabilize, involved extensive international monitoring, created great risks for Europe’s multinational banking enterprises, and helped create the conditions for economic instability in the 1930s. European leaders could expect similar challenges to arise were Greece, Portugal, or Spain to exit the Eurozone today. One crucial factor absent in the 1920s, and still absent today, was and is a robust European-wide financial regulatory system. Ultimately, the Habsburg case study suggests that the economic costs of preserving the Euro and creating such a banking system would be much lower than those arising from allowing one or more countries to leave the currency union.
Is there an easy way out? Private marketable debt and its implications for a Eurozone break-up
David Amiel, Paul-Adrien Hyppolite 15 March 2015
As the Eurozone crisis lingers on, euro exit is now being debated in ‘core’ as well as ‘periphery’ countries. This column examines the potential costs of euro exit, using France as an example. The authors estimate that 30% of private marketable debt would be redenominated, but since only 36% of revenues would be redenominated, the aggregate currency mismatch is relatively modest. However, the immediate financial cost of exiting the euro would nevertheless be substantial if public authorities were to bail out systemic and highly exposed companies.
via Implications of private debt for euro exit | VOX, CEPR’s Policy Portal.
Severe cash constraints faced by the Greek Government due to a pretty demanding schedule of interest and amortization payments in the remainder of 2015 have lately engineered a new explosion of sovereign bond spreads and rekindled fears of a GRexit down the road. Such fears have been exacerbated further in late April 2015 as the progress in implementing the February 20th 2015 Eurogroup agreement has proven to be rather slow and the cash-strapped Greek Government is struggling to meet sizeable debt service obligations. As a result, media reports had been speculating on a number of disastrous scenarios, ranging from the imposition of capital controls or the payment of civil servants and various state suppliers with promissory notes to a sovereign default, either within or outside the Economic and Monetary Union. This paper refrains from analyzing the legal and technical complications involved in the materialization of any of the aforementioned scenarios. Instead, it leans on purely economic and political economy considerations to argue that calls for exit are ill advised, potentially involving immense risks not only for Greece, but also for the EMU project as a whole. We take a close look at Greece’s past history of drachma devaluations and their outcome, the current high sovereign indebtedness, and the country’s persisting competitiveness gap vis-a-vis its main trading partners as well as the effects of financial contagion during the ongoing European Sovereign Debt Crisis. We explain why a GRexit would be a hugely suboptimal (and, in fact, a highly dangerous) strategy to address these problems.
via GRexit and Why It Will Not Happen: Catastrophic for Greece and Destabilizing for the Euro by Platon Monokroussos, Theodoros G. Stamatiou, Stylianos Gogos :: SSRN.
A withdrawal of a member state from the EMU due to market pressure has been a rather popular topic in the public debate in recent years. However, the effects of a withdrawal have been analysed quantitatively surprisingly little. Discussions have been concentrated on the crisis countries, but as the Finnish economic difficulties have deepened also on Finland. In the report, the effects of the potential withdrawal of Greece, one of the weakest economies in the EMU, is studied first. In addition we try to sketch the economic effects of a withdrawal of the relatively more bal- anced Finland. The analysis is made using an international econometric model (NiGEM), where the global economy and the individual economies are described in a rather detailed way based on economic theory and past economic behaviour. Benefits and costs, measured with effects on the GDP, of a withdrawal are related in the short and particu- larly in the longer run to the ability of labour markets to achieve sustainable wage agreements and to the ability to keep the financial markets calm.
via A withdrawal from the Eurozone: Some Simulation Studies with the NiGEM Model.
The Eurozone is facing an existential crisis. Greece has been teetering on the verge of national insolvency. Repeated interventions by the European Union and the International Monetary Fund have so far allowed Greece to avoid this fate, but no one can predict for how long. Portugal, Ireland, and Spain have also had to rely on rescue packages by the European Union, and it remains unclear to what extent their economies will weather the crisis.
One of the options discussed in this context is for individual countries to leave the Eurozone. Initially, this option was brought into play solely for countries like Greece that were at the center of the economic crisis. Some believe that such countries could profit from leaving the Eurozone because a subsequent devaluation of their national currencies would make it easier for their economies to become competitive again.
More recently, however, it has been suggested that some of the more stable EU Member States — most notably Germany — might also want to leave the Eurozone. The chief attraction of such a move would be to avoid being caught by mountainous liabilities generated by ever-new rescue packages
Against this background, a crucial question is whether the Member States have a unilateral right to exit the Eurozone while staying in the European Union. In the existing literature, this question has so far been answered with a resounding, “no.” By contrast, this Article takes the opposite position. More specifically, my argument has two steps: First, I show that, as a doctrinal matter, the case against a right to withdraw from the Eurozone is far from compelling. Second, I demonstrate that, under certain conditions, a right to leave the Eurozone is desirable as a matter of legal policy.
via The Right to Leave the Eurozone by Jens Dammann :: SSRN.
The eurozone countries are currently sitting on an aggregate exposure to Greece exceeding €300 billion. If the country were to exit the eurozone, it would certainly not be able to service its debt in the short run when the exchange rate overshoots. Over the longer run, however, the exchange rate is likely to return to a longer-run equilibrium and growth is likely to slowly resume closing the output gap. Moreover, exports are likely to grow by more than GDP, thus increasing over time the capacity of the country to service foreign debt. Therefore, the authors conclude, whether or not an exit from the eurozone is followed by default on the official debt depends decisively on the willingness (and ability) of Greece’s European partners to wait and finance the bridge between the short and the long run.
via ‘Grexit’: Who Would Pay for it? by Cinzia Alcidi, Alessandro Giovannini, Daniel Gros :: SSRN.
The paper discusses the role of a dual currency system as a solution to problems experienced by some eurozone countries, especially Greece. The dual currency system as suggested by the author would consist of the euro and a reintroduced national currency, referred to as the “new drachma”. The concept originates from an analysis of the roots of the present crisis, which include a severe loss of international competitiveness by countries hardest hit by the crisis. The analysis leads to the conclusion that devaluation (as opposed to “internal devaluation”) may be crucial to dealing with the problems at hand. Devaluation is impossible without a national currency and – as far as the literature claims – without a redenomination of assets and liabilities, the author says. However, reintroducing a national currency combined with redenomination would produce many legal, political and economic problems, Koronowski says. He investigates these problems and concludes that an exit from the Economic and Monetary Union (EMU) would have disastrous consequences for the European Union. Meanwhile, a model based on reintroducing a national currency without leaving the EMU would make it possible to minimize, if not completely avoid, these problems, the author says. The article offers an outline of such a model.
via Dual Currency System as a Solution to the Eurozone Crisis.
The future of the euro — what happens if a Member State leaves?
The continued viability of the Eurozone as a single currency area is challenged from time to time. Some doubt the ability of Italy and other Member States to remain in the zone, given their difficulties in complying with the applicable budgetary rules. Even the French Prime Minister has commented that life was sometimes easier with the franc. This article considers some of the consequences which may ensue in the event that a Member State felt compelled to seek an exit from the Eurozone, and to reintroduce its own national currency. The Treaty does not legislate for this type of situation and any such attempt would clearly cause severe strains at a political level. But it would also have a major impact on the financial markets. In particular, there may be doubts about the currency in which continuing monetary obligations should be settled. This article seeks to analyze the legal issues which would arise in this context.
via The future of the euro — what happens if a Member State leaves?.