Geuro: a Parallel Currency as Alternative to the Grexit?

CEIBS MBA programme
CEIBS MBA programme

Greece has been in recession for past seven years and has already partially defaulted. Greece already has a sovereign debt crisis. The Markets are already in turmoil with bond yields very high, and stock markets falling. Greece already has bank runs. Multinationals are not keeping money in Greek banks.

Due to unemployment of 23% and youth unemployment of 53%, there already is a political backlash, with growth of extremism on both left and right of political spectrum. Recent opinion polls suggest that a new Greek government will be dominated by parties rejecting the Toika-led adjustment programme.

The Greek euro exit is the speculated self-abdication – or dismissal – of Greece from the Eurozone. This is known as Grexit, a slang term introduced in 2012 in world business trading. It is a portmanteau combining the words Greek Euro Area exit. The term was introduced by Citigroup’s Chief Analysts Willem Hendrik Buiter and Ebrahim Rahbari on 6 February 2012.

Deutsche Bank’s economics team sees, however, the potential for an alternative path. This alternative idea facilitates running a Greek parallel currency to the Euro, which Deutsche Bank dubs Geuro to represent government issued IoUs to meet current payment obligations . This would enable, in Deutsche Bank’s view, Greece to engineer exchange rate devaluation without formally exiting the EMU (Economic and Monetary Union of the European Union).

The Greek Euro Exit scenario (“Grexit”)

Compared to the hard struggle trying to recover while remaining in the Euro zone, a faster and more sustainable recover could happen if Greece decides to leave the Euro zone. Greece would begin to recover much faster if it is decoupled from the Euro, defaulted and devalued. The two biggest sectors of the Greek economy are shipping and tourism. Both could benefit hugely from a competitive devaluation.

“Plan Z” is the name given to a plan to enable Greece to withdraw from the Eurozone in the event of Greek bank collapse. It was drawn up by officials at the European Commission (Brussels), the European Central Bank (Frankfurt) and the IMF (Washington). Those officials were headed by Jörg Asmussen (member of the executive board of the European Central Bank), Thomas Wieser (Euro working group), Poul Thomsen (IMF) and Marco Buti (European Commission).

In order to prevent premature disclosure no single document was created, no emails were exchanged, and no Greece officials were informed. The plan was based on the 2003 introduction of new dinars into Iraq by the Americans and would have required rebuilding the Greek economy and banking system from the beginning, including isolating Greek banks by disconnecting them from the Target 2 system, closing ATMs and imposing capital and currency controls.

The implementation of Grexit would have to occur “within days or even hours of the decision being made” due to the high volatility that would result. It would have to be timed at one of the public holidays in Greece. In the long-term, Greece would see an improvement in domestic demand. Demand for imports would fall due to higher cost. Greece would benefit from higher exports and (if political situation stabilizes) an inflow of tourism. Furthermore, Greece would no longer feel it is following dictates of EU (i.e. Germany) and would have greater economic and political independence.

The parallel currency scenario (“Geuro”)

Due to political pressure Greece might be unlikely to formally leave the euro, nor are the other euro area countries likely to abandon Greece entirely. The path of least resistance could be the stop of financial assistance to the Greek government and the continuation of payments for debt service and the stabilization of the Greek banks in a European “Bad Bank”.

In this case, a Greek parallel currency to the euro, the Geuro, could emerge when the government issues IoUs to meet current payment obligations. This would also allow Greece to engineer exchange rate devaluation without formally exiting EMU (see chart below). Initially there would be a large depreciation, but at the same time Greek authorities would reclaim some semblance of control to stabilize or even strengthen over time their own Geuro against the Euro. In fact this would leave the door open to a return to the Euro at some point.

Parallel currency exchange rate
Parallel currency exchange rate