November 4th, 2011
12:42 AM GMT
(CNN) - Have you ever been to an event where you felt out of place?
You toy with the option of going home. Cocoa and slippers suddenly regain their appeal.
Then again, you might get some benefit from staying: you might meet someone interesting – your knight in shining armor.
When you do finally head for the door it turns out to be locked and your only alternative is creeping out of the window (hopefully unnoticed).
That is the situation Greece is facing today.
Backed into a corner by those who have bailed it out, the country is facing the twin evils of unprecedented hardship at home and unbearable pressure from its pay masters.
The pay masters are living it large at the elite G-20 gathering in Cannes while Greece's leader is summoned for emergency talks, like an unwelcome gatecrasher soon to be sent on his way lest his presence cloud the occasion.
Like an ambivalent party guest, Greece's on-again – and now apparently off-again - referendum vote on last week's bailout deal raises the possibility that the country's future could well be outside the eurozone.
Irrespective of the posturing on all sides, some fundamental questions remain unanswered.
Here, I try to break it down with the help of some experts like Charles Proctor, partner at lawyers Edwards Wildman and Michael Hart, director of FX strategy at Roubini Global Economics.
1) Could Greece abandon the single currency?
In short, no.
Proctor says the legal framework governing the European Union only talks about a member state leaving the bloc – not the currency. A scenario that is hard to imagine. Even if Greece were to consider a future beyond EU borders for a few years, getting back into this elite club would be fraught with difficulties later down the line.
2) So, could other eurozone members make Greece leave the eurozone?
Again, negative. This is not a two-way door. No matter what Germany and France may say, Proctor says they cannot force Greece to exit the euro area either. “There is no exit door. Either because Greece wants to go through one or because either member states want to push it through one,” he says. Then again, the EU could revise these treaties.
3) Can Greece go back to the drachma?
Greece abandoned its previous currency, the drachma, when it joined the eurozone. In accordance with treaty 128 on the functioning of the EU, eurozone members like Greece have delegated their right to set their own currency to the eurozone. As a result, Greece is not legally allowed to reintroduce its own currency. Proctor says it has revoked that right.
On CNN this week the Greek Foreign Minister did not specifically deny the country was printing drachma at this stage. [Editor's note: The Greek Ministry of Foreign Affairs spokesman, Gregory Delavekouras, has since said via email: "Greece is not printing drachmas anywhere in the world. Greece is a member of the eurozone and will continue to be so."]
4) How much would the drachma be worth?
Hart has thankfully crunched the numbers so I don't have to but even since he made his original calculations a month ago Greece's situation has become more precarious.
The main benefit Greece would get from leaving the euro and returning to the drachma would be being able to set its own rules on how much of its debt it will pay back.
Using a currency as this kind of tool is risky and often viewed as the preserve of the emerging markets like Argentina, Brazil and Turkey.
The drachma was pegged to the European single currency in 2000 at a value of 340.70 drachmas per one euro. To begin to see the benefits of a euro departure and say zero its current account deficit, Hart says Greece would have to devalue the drachma by 50%. Hart says that because the country is so indebted, the drachma could theoretically weaken 120% in real terms – in other words, its actual buying power would be significantly reduced.
Then again, such figures are only relevant if Greece decides to exit through the backdoor, flouting the legal technicalities.
Proctor says if Greece were to abandon the euro it would have to do so "literally overnight." There would be a run on banks across the country as people rush to withdraw their savings in euros before the changeover. If that were the case capital controls would have to be introduced to prevent the banks from collapsing.
We saw this most recently in Argentina when many lost their wealth after the peso was unfixed from the dollar in 2002.
The following list of peak-to-trough devaluations since the mid-90s gives us an idea of what we could be talking about:
- 2002 Argentina: 280 %
- 1999 Brazil: 78 %
- 1998 – 1999 Russia: 330 %
- 1997 – 1998 Indonesia: 660 %
- 1997 – 1998 Thailand: 110 %
- 1994 – 1995 Mexico 115 %
Greece has repeatedly denied it is considering leaving the single currency and until this week open talk of a departure was taboo. Yet the longer it waits, to take a decision, the more it will cost them. Just like that late taxi ride home: the price is always higher, the later you leave – even if the party was a washout.
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