Tag Archives: Greek Drachma

Greek Commissioner Lets Cat Out of the Bag

The Greek EU Commissioner of Fisheries, Maria Damanaki, becomes the first senior EU official who speak openly about the possibility of Greece leaving the euro zone. She warns that Greece must make sacrifices to overcome its debt crisis or face the risk of leaving the euro zone and returning to the Drachma.

“Either we agree with our lenders on a programme of tough sacrifices … or we return to the Drachma.”

Maria Damanaki

It was probably well intended, but this type of comment is actually quite dangerous, the eurointelligence.com points out in their daily briefing. I suppose it’s more dangerous for the EU than for Greece. Anyway – let’s see how the financial markets react during today’s session.

The Greek fisheries Commissioner Maria Damanaki warned Wednesday that Greece must make sacrifices to overcome its debt crisis or face the risk of leaving the euro zone and returning to the drachma.

“I am forced to speak openly. Either we agree with our lenders on a programme of tough sacrifices … or we return to the drachma,” she said, according to the semi-official Athens News Agency.

Ms. Damanaki is the first senior European official to publicly declare that the debt crisis could result in Greece leaving the euro zone and reverting to its old currency.

Olli Rehn’s spokesman immediately dismissed the idea of a return to the drachma, naturally.

(Wasn’t that the guy who publicly denied that the EU ministers was attending a meeting in Luxembourg a couple of weeks ago?)

 Well, if you want rumors, you got it!

At the moment there are rumours that Greece might consider to hold a referendum to gain a mandate for proceeding with further austerity measures, spending cuts and privatizations, Greek newspaper Kathimerini reports.

The idea was raised at a Hellenic Federation of Enterprises (SEV) conference on Tuesday by the group’s chairman, Dimitris Daskalopoulos.

Prime minister Papandreou’s aides says that the minister was not averse to the idea and had actually discussed it with ministers at Monday’s Cabinet meeting.

However, Reuters reports that the Greek government denies that a referendum is a real option.

That seems to have become like a strategy for the Greek government – deny everything.

Meanwhile back in Brussels, the politicians are running around making all kinds of proposals, inventing new words for default and then taking it all back…

Now, German finance minister, Wolfgang Schäuble, seems to have changed his mind about a so-called “soft restructuring” for Greece. (Probably something along the lines of a “reprofiling”).

Speaking with Handelslbatt, the German minister explain that a credit event might be the consequence.

(Translation; credit event = financial havoc).

On top nobody knows how to deal with such a situation in country that is part of a monetary union.

“That would be an entirely different constellation that in 1990’s in Argentina and other countries”, Schäuble adds.

But no matter how you twist it; there’s nothing soft about the austerity measures that are in store for the people of Greece. 

Talking to Frankfurter Allgemeine Zeitung, the Bundesbank president, Jens Weidmann, warns that monetary policy will not clean up the mess after a soft restructuring in Greece.

The German central bank is not opposed the restructuring in principle, he points out in his first interview since taking office this month, adding:“As a question of principle the consequences of mistakes in financial policy must not be rolled over to the central banks. That would be a monetization of state debt. There must be a clear separation of monetary and financial policy.”

Weidmann warned a soft restructuring as currently discussed for Greece – a voluntary extension of the maturities of government bonds for private investors – would inevitably have the consequence that the ECB would no longer accept these bonds as collateral.

(Not even as soft assets?)

Talking about the ECB’s securities market program (SMP) Weidman says it is currently on hold.

Explaining the rationale of the SMP he says:

“The eurosystem has acted in a phase when the fiscal policy was unable to act. By doing so it built a bridge. With the EFSF and the EFSM there are now the instruments and the end of the bridge has been reached. The ECB council agrees that the program is limited in time, the only discussion is about the right timing of the exit.”

Well, Mr. Weideman, I can assure you the EU leaders can stay irrational longer than you can stay in office!

However – as eurointelligence.com also underline – these comments are important because Weidmann chooses to bring the Bundesbank back in line with all the other central banks.

Remember that his predecessor Axel Weber marginalized himself and the Bundesbank by publicly opposing the SMP.

(…I did not mention Merkel or PMS…)

Related by the Econotwist’s:


Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics, Philosophy

Currency: The Weapon of Choice in Trade Wars

During the European debt crisis, in a matter of days, the dollar strengthened by around 10%. The weakness of the Euro and resultant appreciation of the Renminbi by over 14% reduced Chinese exporter’s earnings and competitiveness. Some of the moves reversed equally quickly when markets stabilised. Volatility of currency exchange rates has increased markedly in recent months.

“The US dollar has no enemies, but is intensely disliked by its friends, especially key investors like the Chinese.”

Satyajit Das

“To paraphrase Oscar Wilde, the US dollar has no enemies, but is intensely disliked by its friends, especially key investors like the Chinese,”  author Satyajit Das writes in a blog post at the EUROintelligence.com, Monday. “The Euro is now the “Drachmark”  – a derisory combination of the former Greek Drachma and German Deutschemark,” he adds.

The former trader, and author of the “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives,” goes on:

Investors assumed that the Euro would be a new Deutschemark, supported by German commitment to fiscal and monetary rectitude avoiding Gallic and Mediterranean extravagance. Instead, investors have been left holding a currency underpinned by unexpected German extravagance and Gallic and Mediterranean rectitude.

Despite sclerotic growth, public debt approaching 200% of GDP and a budget where borrowing is greater than tax revenues, the Japanese Yen has risen to its highest level against the dollar in 15 years. China is even switching some of its currency reserves into Japanese government bonds with returns only apparent under powerful electron microscopes.

Fears about the value of any currency have seen a resurgent interest in gold. Traders are now reading their John Milton: “Time will run back and fetch the age of gold.”

Amongst currencies, it is simply a race to the bottom. On 27 September 2010, the Brazilian Finance Minister Guido Mantega stated the obvious speaking of an “international currency war” as governments around the globe compete to lower their exchange rates to boost competitiveness.

Arcane currency shenanigans point to deeper, unresolved economic issues that policymakers are unwilling or unable to confront but whose resolution is crucial to a sustainable recovery and growth.

Since the end of the de facto gold standard and Bretton Woods, currencies increasingly have become weapons of choice in trade and economic wars. In the German and Japanese model of economic development, an undervalued currency is a key mechanism for maintaining competitive costs and high levels of exports to drive growth. Successive generations of emergent countries, most notably China, copied the model.

Despite tensions, the model worked well in a world of strong economic growth and increasing trade. It was a question of dividing growing wealth. The model is more problematic in a world of low growth.

Currently, the world may be entering a period of lower growth. Consumer spending, funded in developed countries by debt, has slowed. Given significant over capacity in many industries, business investment is weak. Under increased pressure from money market vigilantes, governments are cutting spending and raising taxes, embracing the “new austerity”.

As growth slows, maintenance of competitiveness requires businesses to manage costs brutally.

Cheaper currency values assist in remaining competitive, avoiding the need to overtly cut costs by reducing wages or cutting benefits, explicitly lowering living standards.

During the global financial crisis, the repeated manoeuvring of China, Japan and Germany to maintain the low value of the Renminbi, Yen and Euro against the dollar was designed to maintain export volumes to cushion the worst effects of the recession.

To a large extent, it reflects the underlying structure of economies heavily geared to exports.

Angela Merkel has repeatedly stated that she sees no change to the export driven German economic model in the near term. For Japan, falling living standards combined with an ageing, falling population means increasing dependence on exports.

For China, increasing wages pressures and domestic inflation means that rising production costs must be offset by other means, including an undervalued currency.

The problem of shifting models is great. In 1985, the Plaza Accord forced Japan to effectively revalue the Yen, setting off a rise from Yen 230 per dollar to Yen 85 per dollar.

The rise in the Yen reduced Japanese export competitiveness and led to a recession. To stimulate the economy, the Bank of Japan and Government pumped large amounts of money into the economy.

Rather than assisting recovery, the money set off a commercial real estate and stock market boom that collapsed spectacularly at the end of 1989 plunging Japan into the “ushinawareta junen” – the Lost Decade.

Aware of the Japanese experience and at risk of repeating the experience, China has fervently resisted revaluing its currency, despite pressure from the US. Recently, Chinese leaders have spoken about the economic and social catastrophe that would result from a major renminbi revaluation.

Chinese Premier Wen Jiabao told an European business conference that: “If we increase the yuan by 20 percent-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil. If China’s economy goes down, it’s not good for the world economy.”

In order to forestall, European calls, led by French President Sarkozy, for a revaluation of the Renminbi, Wen cunningly voiced support for Chinese purchases of Greek debt.

Wen urged Europe not to “join the choir to press China to allow more yuan appreciation.”

The unstable currency order creates distortions, frequently preventing action to deal with economic problems. It leads to countries pursuing odd and sometimes contradictory policies.

For example, financial triage, cutting the unsustainable and unlikely to survive countries out of the Euro, would restore their competitiveness through devaluation. But Germany is unlikely to allow weaker countries to leave the common currency precisely to avoid a sharp increase in the value of the Euro, making its exports less competitive. Contrary to popular view, the Germany has much to lose from changes in or abandonment of the Euro.

Recent German economic performance has benefited from the effects of a stronger Yen relative to the Euro making its exports more competitive. German corporate profitability has recovered strongly to pre-crisis levels.

More recently, Japan has intervened in currency markets to prevent the Yen testings its 1995 high of Yen 79.75 against the dollar.

Interest rate policies pursued, in part, to manage currencies also perpetuate economic dislocations.

Paralleling the events after the Asian monetary crisis in 1997/1998, the flight to dollars during periods of European instability pushes down interest rates on U.S. government debt. Paradoxically, lower interest rates reduce pressure for deficit reduction by lowering the cost of servicing public debt.

Major reserve currencies, like the dollar, Euro and Yen, provide some ability to offset changes in value by invoicing trade in their own currencies. Unfortunately, for minor currencies, the fact that trade continues to be denominated in the major currencies creates difficulties where a one day move in foreign exchange markets can wipe out the entire profit margin.

The higher volatility means that the cost of hedging the risk of such currency moves is large, reducing profitability.

The currency crisis highlights the “beggar thy neighbour” policies pursued by many economies. China, Japan and Germany have consistently pursued policies that emphasise high domestic savings, low domestic consumption and an undervalued currency to drive its export driven economies.

These global imbalances contributed significantly to the current financial problems.

A global economic order where a few countries save and lend to finance their exports while other countries act as consumers of last resort is unsustainable.

A system where each country seeks to maximise its own competitive position and financial security at the expense of trading partners is not viable.


Satyajit Das


An emerging toxic combination of inflexible global currency arrangements, a destructive cycle of currency devaluations, trade restrictions and the need of governments to rein in spending to balance budgets is reminiscent of the 1930’s.


They threaten a period of prolonged global economic stagnation.

The globalization of complex financial relationships, much lauded before the crisis, is now proving a liability in resolving the crisis.

Optimists must rely on Israeli politician Abba Eban’s observation that “History teaches us that men and nations behave wisely once they have exhausted all other alternatives.”

By Satyajit Das

Related by Econotwist’s:

EU’s Bank Rescue Turning Into Political And Economic Catastrophe

QE Expectations Continues To Fuel The Risk Rally

Commodities: Dollar Movements And QE2 Sets The Agenda

Credit Wrap: The Spectre of Mercantilism

A QE Fixation

Japan Struggle To Weaken Yen

The Ultimate Trading Weapon

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Filed under International Econnomic Politics, National Economic Politics