Reverting to Drachma May Send Greek Currency at Least 40% Lower

Greece Staggers Into Economic Unknown

Greece’s citizens would see a 40 percent drop in their purchasing power should the nation replace the euro with its erstwhile currency, according to analysts.

“Initially there would be a massive selloff, something in the region of 30 to 40 percent depreciation against the dollar,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “We will get fresh all-time lows” for the drachma, he said.

The risk of Greece leaving -- or being forced out of -- the 19-nation euro is growing after Prime Minister Alexis Tsipras called a referendum on the terms demanded in return for financial aid. While Jones, together with analysts from ING Groep NV and Credit Agricole SA said that’s not their base-case scenario, they’ve started to consider where the drachma would trade if Greece did exit the European Monetary Union.

A weaker currency may help the Greek economy grow by boosting exports and encouraging investment from abroad. Any potential benefits risk being negated by “structurally higher funding costs” for Greece, according to Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA’s corporate and investment-banking unit in London.

“One of the reasons we believe that the Greeks want to stay in the euro, and will ultimately do, is the heavy economic toll that their economy will have to pay under Grexit,” Marinov said. He estimates, based on previous financial and bank crises, that the “depreciation involved is of the magnitude of 40 percent against the dollar” after 12 months.

Irreversible Project

Greece “adopted the euro in 2001, in time to be among the first wave of countries to launch euro banknotes and coins” on Jan. 1, 2002, according to information on the European Commission’s website. No country has left the currency bloc and there’s no formal mechanism for this to happen.

“This would be somewhat unprecedented because it was believed the euro is an irreversible project,” Mizuho’s Jones said. Going back to the drachma would be “very complicated, very severe, take a long time and it will be a very bumpy rocky ride,” he said.

ING’s head of currency strategy in London, Chris Turner, agreed with Jones and Marinov that a Greek exit from the euro region wasn’t the most likely scenario.

“In light of EMU exit, I think expectations of a 50 percent decline looks appropriate” against the euro, he said.

Leaving the Euro Gives Greece a Chance at Growth: Stein

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