There's No Gentle Way for Greece to Exit the Euro

The man responsible for ditching Argentina's convertibility law has some advice for Greece
A man waves an Argentine flag at the Plaza de Mayo in Buenos Aires on Dec. 20, 2001, after police used tear gas to disperse demonstrators. Photograph by Fabian Gredillas/AFP/Getty Images

Those who favor Greece’s exit from the euro like to argue that the transition from Europe’s single currency back to the drachma, or some newfangled scrip, need not devolve into chaos. In a 53-page paper titled “A Primer on the Euro Breakup: Default, Exit and Devaluation as the Optimal Solution,” Jonathan Tepper says that “during the past century 69 countries have exited currency areas with little downward economic volatility.” Tepper, the chief economist at the London-based research firm Variant Perception, cites the partition of India and Pakistan in 1947 and the dissolution of the Soviet Union in the 1990s among examples. He also refers to Argentina’s default and devaluation in 2001-2002, which has become a preferred case study on how a nation can not just survive the process of exiting a currency union, but also prosper from it.

In fact, though, there’s no graceful way for Greece to exit the euro. It eliminated the possibility of doing so when it permanently retired its own currency, the drachma, in 2001.

No question Argentina is better off for having abandoned convertibility, a policy that pegged the local currency, the peso, to the dollar at a 1-to-1 rate. After contracting nearly 11 percent in 2002, gross domestic product rebounded strongly, buoyed by high prices and rising demand for the country’s agricultural exports. The nation has logged annual growth rates above 8 percent in seven of the last 10 years.

Interviews with Argentine officials who were in office at the time of the default and devaluation reveal that a great deal of policymaking during that period was improvised and on-the-fly. And no wonder. The country went through six presidents in the space of a month, leading pundits to remark that a revolving door had been installed at the entrance of the Casa Rosada, the presidential palace. Some 37 million people went to bed each night not knowing who would be in charge in the morning—or how much the money in their wallets and bank accounts might be worth the next day.

Some of the uncertainty was by design. Any central banker will tell you how difficult it is to pre-announce a devaluation without sending your currency into free-fall. In the 1990s, Mexico, Russia, and Brazil spent billions in reserves defending against speculative attacks after botched attempts at adjusting their currencies’ trading bands.

“It must be a shock policy,” says Remes Lenicov, who became Argentina’s minister of economy in January 2002, in the thick of the crisis. Over a period of two months, he unleashed a barrage of measures. One of his first acts in office was to secure the repeal of the law allowing free convertibility of pesos into dollars. The peso swooned, at one point touching 3.8 to the dollar.

“The costs of the adjustment must be spread across different sectors of society,” Lenicov says. Yet in Argentina’s case, the tab was not split equally. Depositors received 1.4 pesos for every dollar they had in the bank, while borrowers were required to pay only 1 peso for each dollar they owed, penalizing lenders. To replenish state coffers, the government imposed tariffs on exports, a move that angered farmers and ranchers. And while authorities refrained from imposing price controls on everyday staples, they did freeze tariffs on public services—so local businesses were privileged over the foreign investors who controlled Argentina’s electric and water utilities.

Variant’s Tepper agrees that the element of surprise is essential:

“Almost all emerging-market devaluations were ‘surprise’ devaluations, and there is no reason to believe that any exit from the euro would not be a surprise as well. There is no technical definition of what constitutes a surprise devaluation, but it would likely involve official denials in public while political leaders prepare the way behind the scenes for devaluation and potentially capital controls.”

Yet unlike Argentina, where the peso continued to circulate alongside dollars over the course of a decade, policymakers in Greece would find it quite difficult to resort to shock-and-awe tactics. Greece retired the drachma when it adopted the euro in 2001. It was a slow and orderly process that took years to complete (in fact, the final deadline for trading in drachmas was just a couple of months ago, on March 12, according to the Central Bank of Greece’s website).

If Greece decides to abandon the single currency, it must start printing drachmas again or introduce some new unit of accounting. If authorities were to announce such a plan, they would certainly trigger the collapse of the local banking industry, as Greeks rushed to withdraw their deposits in anticipation that they would be converted to the new currency. To prevent that from happening, policymakers would have to institute capital controls—perhaps even resort to an Argentine-style corralito, where depositors face stringent restrictions on how much money they can withdraw from their accounts.

Still, an important question remains: How would Greek leaders go about printing piles of new currency without alerting the public and the international community? Perhaps a carefully vetted crew could be sequestered inside the national mint for several days to do the job (sounds like a plot from Mission: Impossible, doesn’t it?). But it’s not just the staff manning the presses that would have to keep from blabbing. What about the officials at customs: Would anyone there suspect that the consignment bound from Switzerland contained a shipment from SIPCA, the company that is the world leader in security inks?

Daniel Marx, who served as Argentina’s secretary of finance until December 2001, believes that the Greeks are in an unenviable position. In hindsight, he thinks it is fortunate that Argentina did not follow the advice of the International Monetary Fund and dollarize entirely, withdrawing the peso from circulation.

Unlike Tepper and other economists who like to emphasize Argentina’s speedy recovery, Marx, who is now the executive director at Quantum Finanzas, a Buenos Aires financial-services firm, believes that the nation has not fully shaken off the effects of the default and devaluation. He says: “I think there was a price that was paid in 2001 and 2002. Then there is another price that is being paid over time. Argentina still suffers a credibility problem.”

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