In the event that exit from the Eurozone should be necessary following a Greek default, it will be difficult and time consuming to reinstate the drachma because of the technical requirements of doing so. Yanis Varoufakis points out that: “To exit, we would have to create a new currency from scratch. In occupied Iraq, the introduction of new paper money took almost a year, 20 or so Boeing 747s, the mobilisation of the US military’s might, three printing firms and hundreds of trucks. In the absence of such support, Grexit would be the equivalent of announcing a large devaluation more than 18 months in advance: a recipe for liquidating all Greek capital stock and transferring it abroad by any means available”.
Here is one possible method of building a bridge between the euro and the drachma:
The Greek government could issue a decree that all euro prices will be redenominated in terms of a non-euro foreign currency, for example the US dollar, the pound sterling, the Turkish lira or even the Russian rouble (let’s call it the dollar for purpose of argument). The exchange rate employed would be based on the euro-dollar exchange rate in force on the day of the exit. A new series of government bonds denominated in dollars would then be created by the government, which would announce that the holders of these new bonds will be treated as being senior to all or at least nearly all earlier lenders (perhaps exempting the IMF if it is desired to facilitate future borrowing from it). If further assurance by the new lenders is needed, the newly issued bond coupons could be directly linked to future foreign exchange receipts from tourism. Buyers of these bonds would pay for them in dollars, resulting in an immediate injection of dollars into the government treasury. The banks could then be recapitalized in dollars by the government, e.g. through equity purchases or long-term dollar loans. The drachma could eventually be reintroduced on the basis of a fixed parity with the dollar, once sufficient ground has been prepared. The Greek government would make the drachma a legal tender at that stage, thus generating a demand for drachma, and the central bank would use open market operations to purchase the existing dollar-denominated debt with drachma. If it were desired the government could simply instruct the (non-independent) central bank to cancel the dollar-denominated government debt that it accumulates as a result of these operation. This instruction would result in an incremental elimination of the government’s dollar liabilities and a permanent increase in the drachma in circulation, which is in any case the desired result. The total amount of foreign currency needed would be a quantity sufficient to meet money demand for the transitional period, in particular for transactions, and so might not result in a large increase in debt, which in any case could progressively be repurchased in drachma issued by the national central bank.
Why could the euro not play the same role in the argument above as the dollar? It could were it not for (1) the likelihood that many of the entities in the Eurozone which might lend sizable amounts in euros will have already done so and will have suffered defaults, so that the promise of seniority will be less of an inducement for them than for others and (2) if they have not then they may still fear legal consequences within the Eurozone of attempting to claim the more senior status newly given to them by the Greek government. The use of a foreign currency may diminish both of these risks to new lenders, if it is chosen by the government appropriately, with exactly the avoidance of these risks in mind, and perhaps even with explicit collaboration of the foreign government issuing the chosen currency. (Given the recent experience of Argentina in the US courts, in which prior lenders’ claims have been given great weight, the participation of US lenders may be in question regardless of the currency used.) The tactical use of the foreign currency would help to stabilize expectations in the short term, and ease a transition to the restoration of a national currency, but dollarization, or roubleization as the case may be, would be the means and not the end.