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When is a Euro not a Euro?

| Posted by: Paul Donovan | Tags: Paul Donovan

  • When is a Euro not a Euro? When it is held in a Greek bank. We have a bank holiday, limits on cash withdrawals and ban on moving Euros out of Greece - echoing the 1932/3 collapse of the US monetary union. Gresham's Law now applies - sensible Greeks will try to hoard physical Euros, and delay paying debts.
  • Contagion, if it happens, is most likely to come via the banking system. Greeks have a viable fear that a Euro held in their banks today may be worth less than a Euro tomorrow. If citizens of other countries start to have the same concern, then contagion is likely to be the result (requiring strong policy action).
  • The evidence to date is that a Greek referendum would vote to accept the creditors' terms - but this would be the basis for a new bail out (as the current deal expires on Tuesday).  A new bail out requires approval from various governments, and some degree of confidence that its terms will be honoured.
  • It is worth noting, in passing, that creating a currency quickly is difficult. The drachma does not exist in physical form, and could not exist for some time. If Greece were to leave the Euro it could only introduce an electronic currency initially. This suggests a divided economy.