Greece is facing a humane crisis

Chat and items of interest about Crete and Greece.
bobscott
Posts: 2658
Joined: Wed Aug 05, 2009 5:36 pm
Location: Kokkino Horio

Postby bobscott » Fri Feb 22, 2013 9:25 am

Stay in the Euro? Go to the Drachma?

It matters very little really.

Unless and until the politicians stop spending hours, days, weeks and even months trying to work out how to line their own pockets out of any project, either EU or privately funded, nothing will change.

It has been said on this forum before : when anything new comes up - 'Follow the money'. Vested interests rule OK!
Yesterday today was tomorrow. Don't dilly dally!

Kilkis
Posts: 11619
Joined: Sat Apr 21, 2007 3:58 pm
Location: Near Chania

Postby Kilkis » Fri Feb 22, 2013 12:38 pm

The return to the Drachma and defaulting on debt are closely tied together. If Greece returned to the Drachma it would be forced to default on its debt. The debt is mostly held by foreign entities and is denominated in Euro. Lets say Greece owes €200 billion Euro and changes to the new Drachma at €1 = 1 new Drachma. It now owes 200 billion new Drachma. Now the new Drachma devalues over a couple of years so that €1 = 5 new Drachma. Greece now owes 1 trillion new Drachma but its GDP in Drachma is about the same as it was when it left the Euro, perhaps a few percent higher. The debt has gone from being 150 % of GDP to around 750 % of GDP. If the interest on the debt was initially 5 % of GDP it becomes 25 % of GDP.

Personally I think it would lead to total anarchy followed closely by a military dictatorship.

Warwick

Fab
Posts: 21
Joined: Wed Jan 23, 2013 12:09 am
Location: London

With or without Dracma/Euro

Postby Fab » Fri Feb 22, 2013 1:28 pm

OK, thanks everybody for the answers.
Let me ask you a question then, and I know it is a difficult one, as we cannot be sure.
If Greece had not joined the Euro, do you think the country would have found itself in the exact same conditions? In other words, were cenrtain countries bound to fail anyway, with or without their own currency? Is/was the Euro idea just an attempt to escape from the inevitable? And if so, is the inevitable just the fact that the system in which we live is not good at all anymore, no matter which currency we use? Therefore do you think governments and banks around the world should call for a total review of what is going on and put down to zero certain debts? And start afresh? At the end of the day when banks go bad the citizens save them through the money of the state, but do not get the shares of those banks, so, if the citezens suffer, why can't the government and banks help? Just because somebody does never want to lose?
Fab

George
Posts: 252
Joined: Sat Jan 26, 2013 3:59 pm
Location: Scotland

Postby George » Fri Feb 22, 2013 3:28 pm

Trying to marry the economies of northern Europe with their southern partners was always doomed to failure. Our failure stems from embracing the American "instant gratification" , and pure greed.
Greece would have had some problems if they had never joined the Euro as corruption has always been readily practiced, at the expense of the poor ( as usual)
Every IMF loan includes a set of mandatory “recommendations” that deplete benefits and welfare schemes for the working class and poor and demands of compliance with Free Trade principles that hurt local economies.
Here in the UK the working class have all clubbed together to ensure the financial sector who started all this ( not Gordon Brown!) still get their multi million pounds in bonuses every year, and are immune from the laws of fraud.
Greece could do well to take a leaf out of Argentinas crisis, where they restructured their debts to a realistic scenario that they dictated.
Then again, Greece will have to wait till September and the German elections when they will be told what to do.

Retired in Crete

Postby Retired in Crete » Fri Feb 22, 2013 4:19 pm

Kilkis wrote:I don't think "being cheap" is a sufficient condition to encourage investment, Fab. Investors invest with the aim of getting a return on their investment. If Greece went back to the Drachma and that devalued, as it inevitably would, then a foreign investment would need to grow in Drachmas as fast as the Drachma devalues just to stand still in the original currency of the investor. It would have to grow even faster for the investor to get a return. What opportunities do you envisage in Greece that could generate that sort of growth?


Warwick,
Again you are confusing cost with value (we have had this discussion before) and forgetting that currency is only a medium of exchange and has no value of its own.
An example. I “invest” in a new Mercedes car. I pay 40,000 Euros for it. Now a new car depreciates by about 10% when I drive it out of the showroom so on the day I take delivery it is worth 36,000 Euros. The next day Greece reverts to the Drachma and devalues by 20%. Has my car instantly lost 20% of its value? No, its value stays the same (36,000 Euros) but should I chose to sell it my selling price in Drachma, at the new rate of exchange, would increase by 20%. Remember that my selling price is the original cost price (which in Drachma is higher) less the 10% depreciation.

Ditto with your foreign investment. The value of the investment would be the same irrespective of the currency, so it would not need to grow to cover the devaluation.


Kilkis wrote:
In general investors look for stability. They don't like uncertainty and Greece with the Drachma would be a very uncertain place. That is why so much money left the country when there was a suggestion that Greece might exit the Euro.


In my opinion, money left the country because of fears that the banks would become insolvent and be unable to meet their obligations. My cash was in the bank for safe keeping, not for investment!

Kilkis wrote:The return to the Drachma and defaulting on debt are closely tied together. If Greece returned to the Drachma it would be forced to default on its debt. The debt is mostly held by foreign entities and is denominated in Euro. Lets say Greece owes €200 billion Euro and changes to the new Drachma at €1 = 1 new Drachma. It now owes 200 billion new Drachma.


If Greece reverted to the Drachma there would be no need to default on the debt. The 200 billion Drachma debt could be repaid almost instantly by printing money. The UK has already printed 375 billion with little effect on the countries inflation although it has reduced the value of the pound on the foreign exchanges.

Kilkis wrote:
I don't necessarily think the Euro is a good thing but Greece is in a huge mess because previous governments have put it in a mess. A change of currency won't alter that mess.


Agree totally! (Just to end on a point of agreement)

John

Kilkis
Posts: 11619
Joined: Sat Apr 21, 2007 3:58 pm
Location: Near Chania

Postby Kilkis » Fri Feb 22, 2013 4:51 pm

I don't believe your example of the Mercedes is valid. The Mercedes is produced in Germany. Its cost is determined in Germany in Euro. As the Drachma devalued, the cost in Drachma of a new one imported to Greece would go up accordingly. It is not unreasonable to suppose that the one already existing in Greece might also track upwards to follow the price of a new one, as you suggest.

When someone invests in Greece from outside, however, their money is then in some sort of Greek activity. There is no guarantee that the value of that Greek activity would track currencies outside Greece. If it is predominantly determined by Greek market conditions then it would tend to stay fixed relative to the Drachma. Anyone involved with inward investment will tell you that currency stability is a vital factor in deciding whether to invest or not.

I agree that some money left because of fears of insolvency but a lot also left because of fears of devaluation. Individuals tended to dominate the former while companies mostly fell into the latter category. It wasn't only Greece. Large multi-national companies were moving any excess cash out of Euro even overnight because of fears that the Euro might be badly affected by a Greek default/exit.

And exactly who would accept the Drachma they printed? They can't print Euro and the debt is denominated in Euro. I suspect that while there might be a nominal exchange rate, such as tourists might use, the lenders, and probably businesses outside Greece, would only accept hard currency. This is the situation that exists in many countries. The only hard currency they have would be from tourists and anything they export. That wouldn't even cover the interest.

Warwick

PS Money does have an intrinsic value. It is basically a mechanism for extended bartering. Its intrinsic value is the trust people have in it that when they come to enact their part of the barter it will allow them to do so. The Drachma would soon lose that value.


Return to “Chatter”

Who is online

Users browsing this forum: No registered users and 7 guests