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When does Greece go?

| Posted by: Paul Donovan | Tags: Paul Donovan

  • After the weekend "no" vote of Greece, the question investors must try to answer is when Greece can be deemed to have exited the Euro? In one sense the functioning part of the Greek economy will not leave – an illegal economy based on physical Euros would exist alongside an electronic drachma (parallels to dollar use in Argentina or the Soviet Union).
  • In another sense, Greece has left the Euro already. A Euro in a Greek bank is clearly perceived as having less worth than a Euro in a Greek person's hands, and as having less worth than a Euro in another part of the Euro area.
  • Exit from the Euro can probably be assumed if the Greek government makes payments in anything other than Euros (IOUs, drachma, etc.). At that point it will be possible to calculate a black market exchange rate for the de facto drachma by comparing prices in hard Euro currency with prices in exchange for whatever the government uses for payments.
  • Contagion risks really start when the depreciation of a de facto drachma is known- it quantifies the risks bank depositors have in other countries, as to the potential losses on their bank deposits. It is worth noting that once again opinion polls utterly failed to predict this outcome – creating problems for markets seeking to interpret politics.