June 12, 2012

PLAN B: an orderly grexit

Next weekend we will see if eurozone will turn to be the largest poker table of the world. If Syriza wins the greek elections and gets enough support to form a govern, the poker game will start. As Alexis Tsipras Syriza’s leader said recently, both Greek and Germans have the nuclear button, but none of them shall push the button. Much has been said about the terrific consequences for both parts is a Grexit in fact materializes.

Here I will present a different approach. One may wonder way a currency union cannot breakup orderly? In fact, one of the main motivations from one country to leave is to be able to devaluate strongly its currency and be able to adjust its external balances, turning its economy more competitive. The disorderly way is, as usual, make things happen by surprise, overnight (or more frequently, over weekend). In this way, all the economic agents don’t have the chance to prevent themselves to the devaluation of the local currency. But in the case of the Eurozone this may not be the most appropriate solution, because economic agents from other fragile economies will sooner than latter start to prepare themselves for a similar scenario in their domestic economies and will create a chain of the events that will stop only with the complete breakup of the Eurozone.

So, this time ,the approach need to be different. How? Eurozone need to negotiate with Greece an orderly Grexit, in such a way that economic agents don’t get rewarded by start bank runs and opening bank accounts abroad. One orderly process must be created that allow any country to leave the Eurozone, step by step, along several years, allowing economy and agents to adapt smoothly to the new conditions. One kind of the process a country may follow in order to join the Eurozone shall be put in place for any country that wants or needs to exit from Eurozone.

The features of such a roadmap to a Grexit are not easy to design, but I think that one of the most important issues should be to peg the new currency to the euro. This peg should be agreed by Greek authorities but guaranteed by the ECB, because it is the only entity able to secure the value of the new drachma against the euro. Off course, this would come as a additional cost to the ECB, but a little cost in order to save the Eurozone. Off course, a peg doesn’t imply that the currency will not devaluate. It’s necessary that the devaluation occurs, but not overnight but along a multi-year period, let say 8% each year during 3 years. The capital flight could be stopped if the new national currency offers an interest rate of 8%, so local depositors will get paid for the devaluations. If this can be done, with wages moderation in the economy, it will become more competitive each year, and local agents will not face huge purchasing power losses overnight. Although, inflation would also next to the level of 8%, and wages shall be maintained frozen. That is the adjustment that is necessary to the economy. Some people may want to emigrate, but that is healthy for the domestic economy. And most importantly, there is not a major will to take capitals out of the country, and this environment of programmed currency devaluations are not a problem for economic agents, as the uncertainty is removed from the picture.

Most importantly, economic agents from other fragile economies would be less nervous because they would know that if the country where they do business will have one day to leave the Eurozone, the process will be conducted in an orderly way and they will not feel need to take capitals out of their countries sooner than latter anymore.

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6 comments:

Firozali A.Mulla MBA PhD said...

I had heard once that everything in the world is negotiable but then depend who is you are talking to. Ladies will not budge. Germany has reiterated that Greece's bailout terms are non-negotiable, as the country attempts to form a new coalition government. Greek voters decided to stick with the euro in an election, which narrowly handed victory to the pro-bailout party, New Democracy. But the centre-right party only secured 29.7% of the vote, meaning it has to cobble together a coalition to achieve a working majority in the 300-seat parliament. The party's leader Antonis Samaras has met with President Karolos Papoulias, who asked him formally to try and assemble a government. The outcome of the election provided respite to some EU leaders, but Germany has stressed that it expects the next Greek government to stick to the terms of its bailout agreement. Chancellor Angela Merkel was the first European leader to phone and congratulate Mr Samaras, saying she would "work on the basis that Greece will meet its European commitments". And Germany's foreign minister, Guido Westerwelle, reiterated the point. "The substance of the reforms is not negotiable," he said. "Whatever government is formed must stick to what has been agreed with Europe.”” What a strange title!! The Greek people have voted for corruption and a continuation of the client - politician relationship. The first thing Samaras said in his first announcement was about creating thousands of jobs - oh yes, you now have a lot of people you have promised work, in exchange for their votes!! So the corruption goes on and on and on with the support of the rest of Europe!! Shame on the rest of Europe for supporting the corruption that caused Greece's troubles!!. The euro jumped to one-month high and Asian shares rose nearly 2 percent on Monday after Greece's election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together. U.S. stock index futures and riskier commodities such as crude oil and copper also rose, while gold fell after a rally last week, when investors had looked to bullion as a safe haven amid fears the election could trigger financial turmoil But analysts cautioned there were still plenty of hurdles ahead and the initial positive market reaction could prove to be short-lived. "The question is whether there will be a sustained rebound as there's still so many things to sort out - the euro zone's fiscal problems and Spanish banks," said Masayuki Doshida, senior market analyst at Rakuten Securities in Tokyo. Parties in Greece that broadly support the 130 billion-euro EU/IMF bailout will begin forging a government on Monday. The parties, New Democracy and PASOK, would have a parliamentary majority. Financial markets had feared a victory for SYRIZA, the radical leftists opposed to the austerity package of job, wage and pension cuts that are a condition of the bailout, without which Greece would be bankrupt. If you write to impress it will always be bad, but if you write to express it will be good-Thornton Wilder, writer (1897-1975) I thank you Firozali A.Mulla DBA

Firozali A.Mulla MBA PhD said...

I had heard once that everything in the world is negotiable but then depend who is you are talking to. Ladies will not budge. Germany has reiterated that Greece's bailout terms are non-negotiable, as the country attempts to form a new coalition government. Greek voters decided to stick with the euro in an election, which narrowly handed victory to the pro-bailout party, New Democracy. But the centre-right party only secured 29.7% of the vote, meaning it has to cobble together a coalition to achieve a working majority in the 300-seat parliament. The party's leader Antonis Samaras has met with President Karolos Papoulias, who asked him formally to try and assemble a government. The outcome of the election provided respite to some EU leaders, but Germany has stressed that it expects the next Greek government to stick to the terms of its bailout agreement. Chancellor Angela Merkel was the first European leader to phone and congratulate Mr Samaras, saying she would "work on the basis that Greece will meet its European commitments". And Germany's foreign minister, Guido Westerwelle, reiterated the point. "The substance of the reforms is not negotiable," he said. "Whatever government is formed must stick to what has been agreed with Europe.”” What a strange title!! The Greek people have voted for corruption and a continuation of the client - politician relationship. The first thing Samaras said in his first announcement was about creating thousands of jobs - oh yes, you now have a lot of people you have promised work, in exchange for their votes!! So the corruption goes on and on and on with the support of the rest of Europe!! Shame on the rest of Europe for supporting the corruption that caused Greece's troubles!!. The euro jumped to one-month high and Asian shares rose nearly 2 percent on Monday after Greece's election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together. U.S. stock index futures and riskier commodities such as crude oil and copper also rose, while gold fell after a rally last week, when investors had looked to bullion as a safe haven amid fears the election could trigger financial turmoil But analysts cautioned there were still plenty of hurdles ahead and the initial positive market reaction could prove to be short-lived. "The question is whether there will be a sustained rebound as there's still so many things to sort out - the euro zone's fiscal problems and Spanish banks," said Masayuki Doshida, senior market analyst at Rakuten Securities in Tokyo. Parties in Greece that broadly support the 130 billion-euro EU/IMF bailout will begin forging a government on Monday. The parties, New Democracy and PASOK, would have a parliamentary majority. Financial markets had feared a victory for SYRIZA, the radical leftists opposed to the austerity package of job, wage and pension cuts that are a condition of the bailout, without which Greece would be bankrupt. If you write to impress it will always be bad, but if you write to express it will be good-Thornton Wilder, writer (1897-1975) I thank you Firozali A.Mulla DBA

Anonymous said...

I had heard once that everything in the world is negotiable but then depend who is you are talking to. Ladies will not budge. Germany has reiterated that Greece's bailout terms are non-negotiable, as the country attempts to form a new coalition government. Greek voters decided to stick with the euro in an election, which narrowly handed victory to the pro-bailout party, New Democracy. But the centre-right party only secured 29.7% of the vote, meaning it has to cobble together a coalition to achieve a working majority in the 300-seat parliament. The party's leader Antonis Samaras has met with President Karolos Papoulias, who asked him formally to try and assemble a government. The outcome of the election provided respite to some EU leaders, but Germany has stressed that it expects the next Greek government to stick to the terms of its bailout agreement. Chancellor Angela Merkel was the first European leader to phone and congratulate Mr Samaras, saying she would "work on the basis that Greece will meet its European commitments". And Germany's foreign minister, Guido Westerwelle, reiterated the point. "The substance of the reforms is not negotiable," he said. "Whatever government is formed must stick to what has been agreed with Europe.”” What a strange title!! The Greek people have voted for corruption and a continuation of the client - politician relationship. The first thing Samaras said in his first announcement was about creating thousands of jobs - oh yes, you now have a lot of people you have promised work, in exchange for their votes!! So the corruption goes on and on and on with the support of the rest of Europe!! Shame on the rest of Europe for supporting the corruption that caused Greece's troubles!!. The euro jumped to one-month high and Asian shares rose nearly 2 percent on Monday after Greece's election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together. U.S. stock index futures and riskier commodities such as crude oil and copper also rose, while gold fell after a rally last week, when investors had looked to bullion as a safe haven amid fears the election could trigger financial turmoil But analysts cautioned there were still plenty of hurdles ahead and the initial positive market reaction could prove to be short-lived. "The question is whether there will be a sustained rebound as there's still so many things to sort out - the euro zone's fiscal problems and Spanish banks," said Masayuki Doshida, senior market analyst at Rakuten Securities in Tokyo. Parties in Greece that broadly support the 130 billion-euro EU/IMF bailout will begin forging a government on Monday. The parties, New Democracy and PASOK, would have a parliamentary majority. Financial markets had feared a victory for SYRIZA, the radical leftists opposed to the austerity package of job, wage and pension cuts that are a condition of the bailout, without which Greece would be bankrupt. If you write to impress it will always be bad, but if you write to express it will be good-Thornton Wilder, writer (1897-1975) I thank you Firozali A.Mulla DBA

Anonymous said...

I had heard once that everything in the world is negotiable but then depend who is you are talking to. Ladies will not budge. Germany has reiterated that Greece's bailout terms are non-negotiable, as the country attempts to form a new coalition government. Greek voters decided to stick with the euro in an election, which narrowly handed victory to the pro-bailout party, New Democracy. But the centre-right party only secured 29.7% of the vote, meaning it has to cobble together a coalition to achieve a working majority in the 300-seat parliament. The party's leader Antonis Samaras has met with President Karolos Papoulias, who asked him formally to try and assemble a government. The outcome of the election provided respite to some EU leaders, but Germany has stressed that it expects the next Greek government to stick to the terms of its bailout agreement. Chancellor Angela Merkel was the first European leader to phone and congratulate Mr Samaras, saying she would "work on the basis that Greece will meet its European commitments". And Germany's foreign minister, Guido Westerwelle, reiterated the point. "The substance of the reforms is not negotiable," he said. "Whatever government is formed must stick to what has been agreed with Europe.”” What a strange title!! The Greek people have voted for corruption and a continuation of the client - politician relationship. The first thing Samaras said in his first announcement was about creating thousands of jobs - oh yes, you now have a lot of people you have promised work, in exchange for their votes!! So the corruption goes on and on and on with the support of the rest of Europe!! Shame on the rest of Europe for supporting the corruption that caused Greece's troubles!!. The euro jumped to one-month high and Asian shares rose nearly 2 percent on Monday after Greece's election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together. U.S. stock index futures and riskier commodities such as crude oil and copper also rose, while gold fell after a rally last week, when investors had looked to bullion as a safe haven amid fears the election could trigger financial turmoil But analysts cautioned there were still plenty of hurdles ahead and the initial positive market reaction could prove to be short-lived. "The question is whether there will be a sustained rebound as there's still so many things to sort out - the euro zone's fiscal problems and Spanish banks," said Masayuki Doshida, senior market analyst at Rakuten Securities in Tokyo. Parties in Greece that broadly support the 130 billion-euro EU/IMF bailout will begin forging a government on Monday. The parties, New Democracy and PASOK, would have a parliamentary majority. Financial markets had feared a victory for SYRIZA, the radical leftists opposed to the austerity package of job, wage and pension cuts that are a condition of the bailout, without which Greece would be bankrupt. If you write to impress it will always be bad, but if you write to express it will be good-Thornton Wilder, writer (1897-1975) I thank you Firozali A.Mulla DBA

Anonymous said...

I had heard once that everything in the world is negotiable but then depend who is you are talking to. Ladies will not budge. Germany has reiterated that Greece's bailout terms are non-negotiable, as the country attempts to form a new coalition government. Greek voters decided to stick with the euro in an election, which narrowly handed victory to the pro-bailout party, New Democracy. But the centre-right party only secured 29.7% of the vote, meaning it has to cobble together a coalition to achieve a working majority in the 300-seat parliament. The party's leader Antonis Samaras has met with President Karolos Papoulias, who asked him formally to try and assemble a government. The outcome of the election provided respite to some EU leaders, but Germany has stressed that it expects the next Greek government to stick to the terms of its bailout agreement. Chancellor Angela Merkel was the first European leader to phone and congratulate Mr Samaras, saying she would "work on the basis that Greece will meet its European commitments". And Germany's foreign minister, Guido Westerwelle, reiterated the point. "The substance of the reforms is not negotiable," he said. "Whatever government is formed must stick to what has been agreed with Europe.”” What a strange title!! The Greek people have voted for corruption and a continuation of the client - politician relationship. The first thing Samaras said in his first announcement was about creating thousands of jobs - oh yes, you now have a lot of people you have promised work, in exchange for their votes!! So the corruption goes on and on and on with the support of the rest of Europe!! Shame on the rest of Europe for supporting the corruption that caused Greece's troubles!!. The euro jumped to one-month high and Asian shares rose nearly 2 percent on Monday after Greece's election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together. U.S. stock index futures and riskier commodities such as crude oil and copper also rose, while gold fell after a rally last week, when investors had looked to bullion as a safe haven amid fears the election could trigger financial turmoil But analysts cautioned there were still plenty of hurdles ahead and the initial positive market reaction could prove to be short-lived. "The question is whether there will be a sustained rebound as there's still so many things to sort out - the euro zone's fiscal problems and Spanish banks," said Masayuki Doshida, senior market analyst at Rakuten Securities in Tokyo. Parties in Greece that broadly support the 130 billion-euro EU/IMF bailout will begin forging a government on Monday. The parties, New Democracy and PASOK, would have a parliamentary majority. Financial markets had feared a victory for SYRIZA, the radical leftists opposed to the austerity package of job, wage and pension cuts that are a condition of the bailout, without which Greece would be bankrupt. If you write to impress it will always be bad, but if you write to express it will be good-Thornton Wilder, writer (1897-1975) I thank you Firozali A.Mulla DBA

Anonymous said...

I had heard once that everything in the world is negotiable but then depend who is you are talking to. Ladies will not budge. Germany has reiterated that Greece's bailout terms are non-negotiable, as the country attempts to form a new coalition government. Greek voters decided to stick with the euro in an election, which narrowly handed victory to the pro-bailout party, New Democracy. But the centre-right party only secured 29.7% of the vote, meaning it has to cobble together a coalition to achieve a working majority in the 300-seat parliament. The party's leader Antonis Samaras has met with President Karolos Papoulias, who asked him formally to try and assemble a government. The outcome of the election provided respite to some EU leaders, but Germany has stressed that it expects the next Greek government to stick to the terms of its bailout agreement. Chancellor Angela Merkel was the first European leader to phone and congratulate Mr Samaras, saying she would "work on the basis that Greece will meet its European commitments". And Germany's foreign minister, Guido Westerwelle, reiterated the point. "The substance of the reforms is not negotiable," he said. "Whatever government is formed must stick to what has been agreed with Europe.”” What a strange title!! The Greek people have voted for corruption and a continuation of the client - politician relationship. The first thing Samaras said in his first announcement was about creating thousands of jobs - oh yes, you now have a lot of people you have promised work, in exchange for their votes!! So the corruption goes on and on and on with the support of the rest of Europe!! Shame on the rest of Europe for supporting the corruption that caused Greece's troubles!!. The euro jumped to one-month high and Asian shares rose nearly 2 percent on Monday after Greece's election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together. U.S. stock index futures and riskier commodities such as crude oil and copper also rose, while gold fell after a rally last week, when investors had looked to bullion as a safe haven amid fears the election could trigger financial turmoil But analysts cautioned there were still plenty of hurdles ahead and the initial positive market reaction could prove to be short-lived. "The question is whether there will be a sustained rebound as there's still so many things to sort out - the euro zone's fiscal problems and Spanish banks," said Masayuki Doshida, senior market analyst at Rakuten Securities in Tokyo. Parties in Greece that broadly support the 130 billion-euro EU/IMF bailout will begin forging a government on Monday. The parties, New Democracy and PASOK, would have a parliamentary majority. Financial markets had feared a victory for SYRIZA, the radical leftists opposed to the austerity package of job, wage and pension cuts that are a condition of the bailout, without which Greece would be bankrupt. If you write to impress it will always be bad, but if you write to express it will be good-Thornton Wilder, writer (1897-1975) I thank you Firozali A.Mulla DBA

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