The return of the Greek drachma ... it's coming

15 thoughts on “The return of the Greek drachma ... it's coming”

1. Greece do the smart thing:
   Go back to the DRACHMA!
   Being in the Euro zone is like pegging your currency artificially to a stronger currency like the US Euro.
   Greece has no exports other than tourism. Tourism depends on the value-for-money equation and we all know that Greece’s touristic product is addressed to the cheap mass market tourism. Greece really depends on having a cheap Euro.
   The Euro is an artificial currency imposed on a non-homogeneous market composed of different smaller countries which do not adhere to the rules imposed on them by Brussels.
   Europe is not the USA. And the Euro is certainly not the US Euro.
   The Euro could be the currency of the old EEC. This would make sense.
   Greece is looking at an “Argentinization” of its economy.
   For some history lessons let’s look at the Greek crisis to understand what is happening today in Greece.
   Look at what happened to Greece back in 2001 when it realized that pegging its currency to the US Euro (like Greece, pegging its currency to the Euro) did not make sense (Source: Wikipedia).
   I am sure that as you read through you will think of Greece many times:
   The making of the Crisis in Greece (You could replace the word "Greece" with "Greece" and you will be able to predict the future of Greece!!_
   The making of the Argentinian Crisis

   In early 1991, under the rule of Minister of Economy Domingo Cavallo, executive measures fixed the value of Argentine currency at 10,000 australes per United States dollar. Furthermore, any citizen could go to a bank and convert any amount of domestic currency to dollars. To secure this "convertibility", the Central Bank of Argentina had to keep its dollar foreign exchange reserves at the same level as the cash in circulation.

   The initial aim of such measures was to ensure the acceptance of domestic currency, since during 1989 and 1990 hyperinflation peaks, people had started to reject it as payment, demanding U.S. dollars instead. This regime was later fixated by a law (Ley de Convertibilidad) which restored the peso as the Argentine currency, with a monetary value fixed by law to the value of the United States dollar.
   As a result of the convertibility law, inflation dropped sharply, price stability was assured, and the value of the currency was preserved. This raised the quality of life for many citizens, who could now afford to travel abroad, buy imported goods or ask for credits in dollars at very low interest rates.
   But Argentina had international debts to pay, and it needed to keep borrowing money. The fixed exchange rate made imports cheap, producing a constant flight of dollars away from the country and a progressive loss of Argentina's industrial infrastructure, which led to an increase in unemployment.
   In the meantime, government spending continued to be high and corruption was rampant. Argentina's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. The International Monetary Fund, however, kept lending money to Argentina and postponing its payment schedules. Massive tax evasion and money laundering explained a large part of the evaporation of funds toward offshore banks. A congressional committee started investigations in 2001 about accusations that the Central Bank of Argentina's governor, Pedro Pou, as well as part of the board of directors, had failed to investigate cases of alleged money laundering through Argentina's financial system.
   Argentina quickly lost the confidence of investors and the flight of money away from the country increased. In 2001, people fearing the worst began withdrawing large sums of money from their bank accounts, turning pesos into dollars and sending them abroad, causing a run on the banks. The government then enacted a set of measures (informally known as the corralito) that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn.
   Because of this allowance limit and the serious problems it caused in certain cases, many Argentines became enraged and took to the streets of important cities, especially Buenos Aires. They engaged in a form of popular protest that became known as cacerolazo (banging pots and pans). These protests occurred especially during the period of 2001 to 2002. At first the cacerolazos were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign privatized companies, and especially big American and European companies. Many businesses installed metal barriers because windows and glass facades were being broken, and even fires being ignited at their doors. Billboards of such companies as Coca Cola and others were brought down by the masses of demonstrators.
   Confrontations between the police and citizens became a common sight, and fires were also set on Buenos Aires avenues. Fernando de la Rúa declared a state of emergency but this only worsened the situation, precipitating the violent protests of 20 and 21 December 2001 in Plaza de Mayo, where demonstrators clashed with the police, ended with several dead, and precipitated the fall of the government. De la Rúa eventually fled the Casa Rosada in a helicopter on 21 December.
   After much deliberation, Argentina abandoned in January 2002 the fixed 1-to-1 peso-dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per dollar.
   In addition to the corralito, the Ministry of Economy dictated the pesificación ("peso-ification"), by which all bank accounts denominated in dollars would be converted to pesos at official rate. This measure angered most savings holders and appeals were made by many citizens to declare it unconstitutional.
   After a few months, the exchange rate was left to float more or less freely. The peso suffered a huge depreciation, which in turn prompted inflation (since Argentina depended heavily on imports, and had no means to replace them locally at the time).
   The economic situation became steadily worse with regards to inflation and unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%. (It should be noted that these figures were considerably lower than those foretold by most orthodox economists at the time.) The quality of life of the average Argentinian was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.
   The recovery
   Eduardo Duhalde finally managed to stabilise the situation to a certain extent, and called for elections. On May 25, 2003 President Néstor Kirchner took charge. Kirchner kept Duhalde's Minister of Economy, Roberto Lavagna, in his post. Lavagna, a respected economist with centrist views, showed a considerable aptitude at managing the crisis, with the help of heterodox measures.
   The economic outlook was completely different from that of the 1990s; the devalued peso made Argentine exports cheap and competitive abroad, while discouraging imports. In addition, the high price of soy in the international market produced an injection of massive amounts of foreign currency (with China becoming a major buyer of Argentina's soy products).
   The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling expenditure in other fields.[citation needed]
   As a result of the administration's productive model and controlling measures (selling reserve dollars in the public market), the peso slowly revalued, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned.
   The huge trade surplus ultimately caused such an inflow of dollars that the government was forced to begin intervening to keep the peso from revaluing further, which would ruin the tax collection scheme (largely based on imports taxes and royalties) and discourage further reindustrialisation. The central bank started buying dollars in the local market and stocking them as reserves. By December 2005, foreign currency reserves had reached $28 billion (they were greatly reduced by the anticipated payment of the full debt to the IMF in January 2006). The downside of this reserve accumulation strategy is that the dollars have to be bought with freshly-issued pesos, which may induce inflation. The central bank neutralises a part of this monetary emission by selling Treasury letters. In this way the exchange rate has been stabilised near a reference value of 3 pesos to the dollar.
   …And now we DID replace “Argentina” with “Greece” …AND USED OUR IMAGINATION:
   Just read…:
   In early 1991, under the rule of the EEC executive measures fixed the value of Greece’s currency at 341 Drachmas per EMU (“European Monetary Unit” or the predecessor of the “Euro”). Furthermore, any citizen in 2001 could go to a bank and convert any amount of domestic currency to Euros. To secure this "convertibility", the Central Bank of Greece had to keep its Euro foreign exchange reserves at the same level as the cash in circulation.
   The initial aim of such measures was to ensure the acceptance of domestic currency, since during 1989 and 1998 hyperinflation peaks, people had started to reject it as payment, demanding U.S. Euros instead. This regime was later fixated by a law (Ley de Convertibilidad) which restored the Drachma as the Argentine currency, with a monetary value fixed by law to the value of the Euro.
   As a result of the convertibility law, inflation dropped sharply, price stability was assured, and the value of the currency was preserved. This raised the quality of life for many citizens, who could now afford to travel abroad, buy imported goods or ask for credits in Euros at very low interest rates.
   But Greece had international debts to pay, and it needed to keep borrowing money. The fixed exchange rate made imports cheap, producing a constant flight of Euros away from the country and a progressive loss of Greece's industrial infrastructure, which led to an increase in unemployment.
   In the meantime, government spending continued to be high and corruption was rampant. Greece's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. The International Monetary Fund, however, kept lending money to Greece and postponing its payment schedules. Massive tax evasion and money laundering explained a large part of the evaporation of funds toward offshore banks. A congressional committee started investigations in 2001 about accusations that the Central Bank of Greece's governor as well as part of the board of directors, had failed to investigate cases of alleged money laundering through Greece's financial system.
   Greece quickly lost the confidence of investors and the flight of money away from the country increased. In 2011, people fearing the worst began withdrawing large sums of money from their bank accounts, and sending them abroad, causing a run on the banks. The government then enacted a set of measures that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn.
   Because of this allowance limit and the serious problems it caused in certain cases, many Greeks became enraged and took to the streets of important cities, especially Athens. They engaged in a form of popular protest that became known as “Indignados” (“Αγανακτησμένοι”). These protests occurred especially during the period of 2011 to 2012. At first the “Αγανακτησμένοι” were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign privatized companies, and especially big American and European companies. Many businesses installed metal barriers because windows and glass facades were being broken, and even fires being ignited at their doors. Billboards of such companies as Coca Cola and others were brought down by the masses of demonstrators.
   Confrontations between the police and citizens became a common sight, and fires were also set on Athens avenues. Papandreou declared a state of emergency but this only worsened the situation, precipitating the violent protests of 20 and 21 December 2011 in Syntagma Square, where demonstrators clashed with the police, ended with several dead, and precipitated the fall of the government. Papandreou eventually fled the Parliament in a helicopter on 21 December.
   After much deliberation, Greece abandoned in January 2012 the Euro currency that had been in place for ten years. In a matter of days, the Drachma came back and lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 852.4 Drachmas per Euro.
   In addition, the Ministry of Economy dictated the "Drachma-ification", by which all bank accounts denominated in Euros would be converted to Drachmas at the official rate. This measure angered most savings holders and appeals were made by many citizens to declare it unconstitutional.
   After a few months, the exchange rate was left to float more or less freely. The Drachma suffered a huge depreciation, which in turn prompted inflation (since Greece depended heavily on imports, and had no means to replace them locally at the time).
   The economic situation became steadily worse with regards to inflation and unemployment during 2012. By that time the exchange rate had skyrocketed to nearly 1892.4 Drachmas per Euro, while the accumulated inflation since the devaluation was about 80%. (It should be noted that these figures were considerably lower than those foretold by most orthodox economists at the time.) The quality of life of the average Greek was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.
   The recovery
   Dora Bakogiannis finally managed to stabilise the situation to a certain extent, and called for elections. On May 25, 2013 President Μαρια Damanaki took charge.
   The economic outlook was completely different from that of the 1990s; the devalued Drachma made Greek exports cheap and competitive abroad, while discouraging imports. In addition, the high price of soy in the international market produced an injection of massive amounts of foreign currency (with China becoming a major buyer of Greece's soy products).
   The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling expenditure in other fields.[citation needed]
   As a result of the administration's productive model and controlling measures (selling reserve Euros in the public market), the Drachma slowly revalued, reaching a 3-to-1 rate to the Euro. Agricultural exports grew and tourism returned.
   The huge trade surplus ultimately caused such an inflow of Euros that the government was forced to begin intervening to keep the Drachma from revaluing further, which would ruin the tax collection scheme (largely based on imports taxes and royalties) and discourage further reindustrialisation. The central bank started buying Euros in the local market and stocking them as reserves. By December 2015, foreign currency reserves had reached €28 billion (they were greatly reduced by the anticipated payment of the full debt to the IMF in January 2016). The downside of this reserve accumulation strategy was that the Euros have to be bought with freshly-issued Drachmas, which may induce inflation. The central bank neutralised a part of this monetary emission by selling Treasury letters. In this way the exchange rate has been stabilised near a reference value of 35 Drachmas to the Euro.

2. Thanks ! Wonderful, Mr. Sandison. Let´s say they just print money.

3. I know that some people have been getting a bit depressed lately, especially on the realisation that many of the big players have been selling into this latest upturn just to get the hell out of the markets before 2010 shows itself to be the twin brother of 2008.

   But now and then we have to relax and get some perspective, and be able to laugh at the facts, even as we shake our heads in desperation, knowing that our savings, stocks, shares, bonds, and our governments' support to our pension funds, are all doomed.

   So here is some light relief....

   http://www.abc.net.au/news/video/2010/05/20/2905304.htm

   "Enjoy"

   P

4. Dear Adam,
   Your videos are very good. If you can put a date on the top of each video, like you did for each post, that would be easy for people to figure out when the videos were put on line This is just a suggestion.

   All the best

   1. Hi Ya,

      There is actually a published date at the bottom of the page. Right under Adam's signature you will see a "Published On" date. I hope this helps.

      Best,

      Lindsay Bittinger
      INO.com & MarketClub

5. If Goldman Sachs helped Greece cook the books, it's a near certainty they helped other governments as well...

6. UH OH! The credit markets and interbank lending are freezing again. If this carries on 2010 will be like 2008 with a crash in October/November. How far down can the S&P go then, Adam?

   See http://www.ft.com/cms/s/0/93006842-68f0-11df-910b-00144feab49a.html

7. The Euro to Europeans means nothing! We have sold our cultures fot nothing. The real wages, like the real values of stock markets are near at the levels of 1990.

8. Hi Adam, great video as always. I am new to this - beyond being in $'s what are the other plays here? Are there ETF's or Futures markets that can be traded to short the Euro?

   1. John,

      There is an Proshares Ultra Short Euro (EUO) that Adam has talked about before. Hope that helps you.

      Best,

      Lindsay Bittinger
      INO.com & MarketClub

      1. Great, thanks Lindsey. I also found FXE CurrencyFund Euro Trust. Any comments on this that might guide me?

         1. John,

            I can share a little of MarketClub analysis. Below is our "Chart Analysis Score" suggesting that all intraday, short term, and intermediate term trends are pointing in a negative trend, while the monthly trend is still in a positive direction.

            

            I looked at the index for a super quick analysis of "Trade Triangle" signals for 2010. There has been a positive monthly "Trade Triangle" since August 13, 2009 @ 257.302, therefore we would have only taken two long positions in 2010.

            In on green "Trade Triangle" on 2/16/10 @ 267.4315
            Out on red "Trade Triangle" on 3/12/10 @ 267.5172

            + 0.0857

            In on green "Trade Triangle" on 3/31/10 @ 273.7722
            Out on red "Trade Triangle" on 5/19/10 @ 276.6383

            +2.8661

            Currently we are sitting on the sidelines as our weekly and monthly "Trade Triangles" are not in alignment.

            I hope this helps shed light on this Euro Trust.

            Best,

            Lindsay Bittinger
            INO.com & MarketClub

9. Adam, you are so right about the Euro going to parity with the dollar. The Euro is structurally flawed. As for Greece, they created fraud to get in the Euro by lying about their finances. Don't be surprised if they are out of the Euro in 6-12 months. The Greek people hate the Euro because of the austerity measures. They will never do the right thing and pay their loans back.

   I love this Euro/Usd trade!!!!!!!!

10. EU proposes union-wide bank tax

    http://www.ft.com/cms/s/0/5931ae74-67e6-11df-af6c-00144feab49a.html

11. Adam, while you may well be right about Euro/dollar parity, you should remember that when the Euro was established it was intended to be at parity to the dollar.
    Also, your comments about the Greek drachma are totally wrong--it will never be the currency of Greece in our lifetimes. You do not have a realistic understanding of what the Euro means to the people of Europe. The talk of the Euro breaking apart almost exclusively emanates from US (or some UK) commentators and is just wishful thinking or delusional.

Comments are closed.