Banks Get Ready for Greek Currency Come Back

REUTERS | MAY 11, 2012

Banks are quietly readying themselves to start trading a new Greek currency. Some banks never erased the drachma from their systems after Greeceadopted the euro more than a decade ago and would be ready at the flick of a switch if its debt problems forced it to bring back national banknotes and coins.

From the end of the Soviet Union – which spawned currencies such as the Estonian Kroon and the Kazakh Tenge – to the introduction of the euro, they have had plenty of practice in preparing their systems to cope with change.

Planning behind the scenes has been underway since Europe’s debt crisis erupted in Greece in 2009, said U.S.-based Hartmut Grossman of ICS Risk Advisors who works with Wall Street banks.

“A lot of the firms, particularly in Europe and also here, have been looking at that for a long time,” said Grossman, who added that the latest Greek political crisis had brought matters “to a little bit of a head”.

“But there really has been contingency planning at all of the financial institutions for that to happen … Greece leaving the euro zone is not a new idea,” he said.

The EU says it wants Greece to stay in the common currency, and opinion polls show Greeks want to keep it. But they also voted last Sunday for parties opposed to a bailout with the EU and IMF, throwing Greece’s future in the bloc back into doubt.

The elections threw into doubt the EU/IMF aid package that came at the price of harsh austerity measures, and was reached only after much haggling between banks and politicians over a 100 billion euro debt reduction.

While the deal averted financial market catastrophe by allowing Greece to continue repaying its reduced debts, any future problems could be yet more troublesome, even if Athens managed the process in a more or less orderly fashion.

A Greek departure from the euro would create legal and practical problems for the banks which would dwarf the relatively straightforward technical job of dealing in a new currency.


Greece would almost certainly impose foreign exchange controls if it were to drop out of the euro, bankers said, but dealing in any new currency would still be possible.

“Forex desks can get ready relatively quickly. It depends on exactly how the exit from the euro happens,” said Lewis O’Donald, the London-based Chief Risk Officer at Japanese investment bank Nomura (9716.T).

Currencies that are not freely tradable, such as the Chinese yuan, are widely mirrored in off-shore foreign exchange markets through the use of derivative instruments, such as non-deliverable forwards, or NDFs.

The problem may be bigger for euro zone banks which need cash for individuals or companies doing business in Greece. They face the problem of what exchange rate to use, depending on the laws Athens might draw up for trade it its currency.

If Greece forced an exchange rate of, say, one euro to one new drachma, this could impose huge losses on foreign banks because such a rate would not hold on the markets.

Controls on the movement of capital could be a nightmare for banks with loans in Greece, potentially making it illegal for companies to repay debt in euros.

Even if it were not illegal, companies might no longer be able to repay foreign creditors because their cash had been converted overnight into drachmas – a currency that would rapidly lose its value due to the dire state of the Greek economy. That would, in turn, make it tough for any lender to get its money back, whatever contract it might have.

“Our assumption is that an exit route somehow has capital controls in place, or an inability for a creditor to enforce (legal rulings) under English law into Greece,” O’Donald said.


Banks have studied several options to protect themselves as best they can, including switching to U.S. law for new derivative transactions or loans. So far few have taken such steps due to doubts about how effective they would be, and also because they are afraid to add to market concerns.

“Banks are very, very reluctant to start shouting ‘fire!’. They know what happens and what panic looks like,” said one London-based lawyer advising financial firms.

Instead, most are simply checking the governing law of their contracts, hedging against defaults and running through every legal argument a Greek euro exit could throw up.

“There are still areas which will be grey in some respect and which will lead to conflicts of law that may have to be resolved in court,” Nomura’s O’Donald said.

Many banks have been simulating a rupture of the euro in “war games”. But little is known about how an exit would work, and legal departments are poring over financial contracts, raising questions about the very nature of a currency.

“If transactions are denominated in the euro, what is the status of those transactions in the event that there is a change of the make-up of that currency?” said Miles Kennedy, a partner at accountancy firm PricewaterhouseCoopers.

With such questions unanswered, stuffing cash machines with enough drachma banknotes is almost an afterthought.

For Greece itself, it certainly won’t pose a problem. The country’s national bank has its own banknote printing press and mint and has continued to print euro banknotes ever since joining the single currency in 2001.

17 Million Unemployed in Euro zone


Unemployment in the euro zone reached its highest level in almost 15 years in February, with more than 17 million people out of work, and economists said they expected job office queues to grow even longer later this year.

Joblessness in the 17-nation currency zone rose to 10.8 percent – in line with a Reuters poll of economists – and 0.1 points worse than in January, Eurostat said on Monday.

“We expect it to go higher, to reach 11 percent by the end of the year,” said Raphael Brun-Aguerre, an economist at JP Morgan in London. “You have public sector job cuts, income going down, weak consumption. The economic growth outlook is negative and is going to worsen unemployment.”

February’s level – last hit in June 1997 – marked the 10th straight monthly rise and contrasts sharply with the United States where the economy has been adding jobs since late last year.

Economists are divided over the wisdom of European governments’ drive to bring down fiscal deficits so aggressively as economic troubles hit tax revenues, consumers’ spending power and business confidence which collapsed late last year.

Separate data released on Monday showed manufacturing activity in the euro zone shrank for an eighth successive month in March, providing further evidence for Brussels’ forecast that euro zone output will shrink 0.3 percent this year.

Despite the gloomy economic vista, the European Central Bank is expected to hold interest rates at 1 percent at its monthly meeting on Wednesday, as rising oil prices keep inflation above its 2 percent target.

“With inflation remaining stubbornly high throughout the euro zone, there is very little hope of a consumer recovery,” said Jennifer McKeown, an economist at Capital Markets.

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Does Germany Intend to Leave the Eurozone?

The Economic Collapse
March 12, 2012

For a long time, most analysts have believed that if someone was going to leave the euro, it would be a weak nation such as Greece or Portugal.  But the truth is that financially troubled nations such as Greece and Portugal don’t want to leave the euro.  The leaders of those nations understand that if they leave the euro their economies will totally collapse and nobody will be there to bail them out.  And at this point there really is not a formal mechanism which would enable other members of the eurozone to kick financially troubled nations such as Greece or Portugal out of the euro.  But there is one possibility that is becoming increasingly likely that could actually cause the break up of the euro.  Germany could leave the euro.  Yes, it might actually happen.  Germany is faced with a very difficult problem right now.

German Chancellor Angela Merkel's Party has passed legislation that would allow the country to leave the Eurozone.

It is looking at a future where it will be essentially forced to bail out most of the rest of the nations in the eurozone for many years to come, and those bailouts will be extremely expensive.  Meanwhile, the mood in much of the rest of Europe is becoming decidedly anti-German.  In Greece, Angela Merkel and the German government are being openly portrayed as Nazis.  Financially troubled nations such as Greece want German bailout money, but they are getting sick and tired of the requirements that Germany is imposing upon them in order to get that money.  Increasingly, other nations in Europe are simply ignoring what Germany is asking them to do or are openly defying Germany.  In the end, Germany will need to decide whether it is worth it to continue to pour billions upon billions of euros into countries that don’t appreciate it and that are not doing what Germany has asked them to do.

German Chancellor Angela Merkel’s Christian Democratic Union party recently approved a resolution that would allow a country to leave the euro without leaving the European Union.

Many thought that the resolution was aimed at countries like Greece or Portugal, but the truth is that this resolution may be setting the stage for a German exit from the euro.

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Spain Spending its way into the Abyss

by Luis R. Miranda
The Real Agenda
March 9, 2012

The continuous rise in public spending in Spain is deeply braking the back of the country’s capacity to keep up with one of the most dire economic situations in the Euro zone. In the last 4 years, Spain has not been able to cope with one of the highest unemployment rates in the developed world. The outcome of the worldwide financial crisis that began in 2006 was not helped by the Spanish government’s socialist policies that are limited to increasing government spending in order to meet its obligations.

Spain's Prime Minister Mariano Rajoy

Much like the socialist government of Barack Obama in the United States, the Prime Minister’s office now headed by Mariano Rajoy, the leader of the Spanish People’s Party, continues to increase the burden known as the public debt. In a recent before the Spanish Congress, the Secretary of Labor, Fátima Bañez García, presented a new plan which seeks to perpetuate the status-quo: promote economic recovery and employment through a government led initiative that balloons public debt and sponsors policies that maintain the welfare state. This model doesn’t seem to work in countries where it was adopted, but for some reason, some European nations, including Spain, believe it is the way to go.

Given the lack of positive results, both the public and private sectors have begun to raise awareness about the unsustainable growth of the debt, which has shed no real solutions to the country’s out of control unemployment problem. Different from other countries in the region, Spain suffers from its skyrocketing 22% unemployment rate — according to official numbers. Depending on what sectors of the economy you look, this number grows even larger. €706 billion have not been enough of a stimulus for the Spanish economy to rebound, mostly because that money is not invested in growing sectors that were once the pillars of a stable nation. Incredibly, Spain’s public debt amounts to more than 60 percent of its gross domestic product — €1.07 trillion — much of which is spent in government operations and welfare programs that yield no significant results.

Currently, Spain’s public debt is larger than the number calculated by the European Union under its standards. Every year, the Spanish government adds mode debt to the deficit but the country does not produce enough to compensate for such spending. According to the Financial Times of London, in 2012 Spain will see an increase of its debt of €60 billion, which is equal to 6 per cent of the GDP. Despite the gigantic commitment made by Rajoy’s government, the amount of euros needed for Spain to keep up with its liabilities and entitlement programs overruns any attempt to overcome them. Meanwhile, the country will have to continue paying bank bailouts, contracts and financing the lives of the dependent classes which continue to rely on the government to get a job, food or any other form of support they need.

Although the government of Spain announced its intention of paying off billions of euros in overdue bills, interest rates on those unpaid bills may grow beyond the reach of the government’s possibilities. It is estimated that Spain’s public debt will soon amount to 87 percent of its GDP, leaving little or no room for error and very little time to implement more effective policies that bring about change to the economy. If the Spanish are not able to lift themselves out of their crisis, the country might need to follow the same path than Greece, which was forced by the European Union to accept financial aid in exchange for remaining as part of the bloc.

In the case of Greece, the infamous bank bailouts did not work, the debt was not liquidated and the country is in an even more dire situation today than it was before the bailouts. As a result of accepting the conditions imposed by the banks, which used the European governments as proxies to operate, Greece has renounced to its financial, economic and social sovereignty, but has not obtained any positive result. Whether Spain will follow in Greece’s steps it is not clear right now, but since the country has already accepted bailout money, it is likely this trend will continue as it happened with their European neighbors.

According to financial experts, Spain’s financial outlook does not look too good. The point of no return — although for many already here — seems to be when Spain’s obligations get to 90 percent of its GDP, a moment when experts say the country will find it difficult to maintain its house in order and to respect its own fiscal policies. As things are going today, some see Spain’s intention to cut its public debt to about 60 percent by 202o as an impossible task.

Incidentally, two of the main reasons why Spain fell into the financial hole it is now are the construction bubble, which exploded just previous to the beginning of the crisis — as it happened in the United States — as well as the adoption of a renewable energy subsidies program under the government of José Luis Zapatero. The program, according to a government report, returned zero euros from investments and instead created a hole in the employment market that cost 2.2 jobs for every job “created” by the state. In other words, for every job that was created by the green energy program sponsored by the Spanish government, the country lost 2.2 job positions.

The economic crisis and the Spanish government involvement in bailout programs that sought to rescue banks in that country made it so the public debt increased to 363 percent of the GDP in 2011.

As it often happens, once governments start to run out of options, they go to the last possible of them: corporate acquisition of public resources. That is, a massive transfer of money and property held by the government in representation of the people, to the hands of large corporations — mostly banks — which are the organizations responsible for the current global financial crisis, but that somehow found fertile land in government to ask for financial bailouts while charging those same governments interests on the money lent to them. In Greece, large corporations are now the owners of much of the country’s patrimony including its islands and major infrastructure. As the months go by and no solutions are presented by the Spanish government to reduce the impact of the ongoing economic depression, which include the liquidation of the debt, it is likely Spain will end giving away its financial and political sovereignty away, as well as handing out its infrastructure and resources to the banks, just as Greece did.

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Hasta la Vista Euro, Hello Peseta!

Spanish village goes back to peseta

by Lee Moran
Mail Online
February 15, 2012

A Spanish town is looking to the past to safeguard the future of its ailing economy by reintroducing  the peseta.

Fed up with the failing euro, rebellious locals in Villamayor de Santiago have reverted to using the old currency, which was phased out a decade ago.

Around 30 shops in the historic town,  75 miles south-east of Madrid, started accepting pesetas last month after urging customers to dig out any old notes and coins they had forgotten about.Bring back the peseta: the desperate Spanish village of Villamayor de Santiago has turned back time and re-introduced the peseta in a bid to kick-start its ailing local economy

 Bring back the peseta: The Spanish village of Villamayor de Santiago has re-introduced the peseta. Pictured is a poster from villages on the border with Portugal which are also campaigning for a permanent return
As they were: The peseta was phased out in 2002 when the euro was introduced

News quickly spread, and shoppers from neighbouring villages and towns have been flocking there to spend the old currency.

Luis Miguel Campayo, chairman of the local merchants’ association, who came up with the idea, said:  ‘People kept hold of old pesetas thinking that they might come in handy one day if the euro fails.

 ‘It seems that those fears might come true. Lots of Spaniards,  especially older people, have a strong emotional attachment to the peseta and still do their sums in it when talking about big transactions. The economy is struggling so much that euros are scarce.

‘We thought that if people had a hunt around for their old pesetas, then why shouldn’t we accept them as legal currency?

‘It was after Christmas and shops really needed a helping hand and this is what we came up with.’

 Exchange: The euro and peseta exchange rate stood at 166.386 pesetas per euro when the single currency was aligned in January 1999

The country introduced the peseta in 1868, joined the euro in December 2001 and phased out the old currency in February 2002.

However, unlike other euro countries such as France and Italy, it never set a deadline for exchanging pesetas into euros.

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