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Guest Post: The US-Dollar Option for Greece’s Economic Stability

The euro zone looks as if it is about to fall apart and the future perspectives for Greece are anything but rosy. The first of EZ countries to seek financial bailout is trapped in a spiral of debt over debt, while the Greeks are deprived of a descent income. Here comes a ‘revolutionary’ proposal from the USA, how Greece could return to economic stability. By exiting the EZ and adopting the US Dollar as its currency for a five-year transition period. Can the US-Dollar be Greece’s savor after the  Euro turned into a nightmare? To tell you the truth, I don’t have the macro-, micro- and what-ever economics knowledge to judge such a post submitted by George Gialtouridis from Boston, MA. the only thing I could comment is that the need of a huge political will would be essential for such a move.

    A proposal for Greece to return to economic stability – the US Dollar Scenario

Greece’s public debt is in euros. It is currently estimated at 360 billion euros.  In US Dollar terms that’s approximately $480 billion.  If Greece exits the Eurozone it will bring the entire currency union to the brink of collapse as many European officials have admitted.

Greece immediately exits the Eurozone and adopts the US Dollar as its de facto currency for a five-year transition period.  The value of the euro may collapse vis-a-vis the US Dollar from the current US$1.32/euro to a possible US$0.80/euro, a roughly 40% decline in the euro’s value.  Such a euro collapse is entirely possible if Greece abruptly exits the Eurozone and is followed by talk of other Eurozone countries following suit as investors will flee to the US dollar as a safe haven currency.  Due to the devalued euro the Greek debt will then calculate to roughly $290 billion in US dollar terms, or a 40% debt reduction in dollar terms.  Remember, at its introduction in 1999, the euro was traded at US$1.18/euro but by October 26, 2000 it had fallen to an all-time low of US$0.8228/euro.  Also, this is not like the ‘haircut’ on Greek sovereign bonds proposed last month which would result in a 100 billion euro debt reduction, at most, with the added risk of a credit event if voluntary private sector involvement (PSI) is not solidly in place.
The US Federal Reserve can help Greece meet its financial obligations during the five year transition period by lending to the Bank of Greece at favorably low interest rates.  The US Federal Reserve is a privately-held institution and it has lent funds to foreign central banks in the past via temporary reciprocal currency arrangements or swap arrangements:
http://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm
Because of the global nature of bank funding markets, the Federal Reserve has at times coordinated with other central banks to provide liquidity.  These Dollar Liquidity Swap Lines have been authorized by the Federal Reserve with various central banks, including the European Central Bank, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank to name a few, in order to provide liquidity in U.S. dollars to overseas markets.
The Federal Reserve operates these swap lines under the authority of section 14 of the Federal Reserve Act and in compliance with authorizations, policies, and procedures established by the Federal Open Market Committee (FOMC).
The Bank of Greece will authorize an initial money supply in New Drachmas in order to exchange or swap for US dollars with the Federal Reserve thus activating such a Dollar Liquidity Swap Line.  The New Greek Drachma will be pegged to the US Dollar at an initial exchange rate of 30 GRD/1 USD.  The New GRD will not circulate during the five-year transition period to prevent currency fluctuation and to alleviate inflationary pressures.  The GRD money supply authorized by the Bank of Greece during the five-year transition period will be used strictly for swaps with the Federal Reserve.  All euros in Greece’s banking system and its economy in general will be immediately converted to US dollars.  For the next five years any shortfalls in Greece’s fiscal budget will be covered by the Federal Reserve funds swapped for the New GRD.  After the five-year transition period Greece will introduce the New GRD as its official currency as it will be allowed to float. 
Due to the nature of the Dollar Liquidity Swap Line, it would need to be rolled-over on a semi-annual or annual basis, much like some bank credit lines. At the conclusion of each transaction term the Bank of Greece will pay interest, at a predetermined rate, to the Federal Reserve.
This plan will boost American investment in Greece, including investments from Greek-Americans who will proudly participate.  A trade treaty between Greece and the US can be signed eliminating all import tariffs between the two countries thus boosting Greek exports to the US.  American tourism to Greece will also be boosted as the currency in both countries will be the same for the next five years.  Greek destinations can be packaged by US tour operators emphasizing on the temporary elimination of the need of currency conversion.
Greece will buy military hardware solely from the US as part of the new arrangement.  Drilling for gas and oil in Greece’s Exclusive Economic Zone can be contracted to US companies.  Bank deposits will return to Greek banks as threats of a default will be diminished. 
Greece’s debt interest costs will be reduced considerably.  An aggressive Greek debt buyback program in the secondary market at the current discounts can further reduce Greece’s debt obligations.  Sound fiscal management should result in a primary budget surplus. Greece will gradually reduce the liquidity swaps with the Federal Reserve until it starts issuing sovereign bonds in the open market at interest rates favorable to Greece.
This plan will install confidence in the new Greek economy and we will immediately see the light at the end of the tunnel.

Georgios Gialtouridis
Boston, MA

 George Gialtouridis was born in Katerini/Greece and  grew up in Boston, MA.  He is  graduate of Boston University, School of Management ans specialized in Risk Solutions.

See Also the Press Release of the Federal Reserve  announcing coordinated actions with other national banks to enhance their capacity to provide liquidity support to the global financial system.

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8 comments

  1. Why not Drachma everywhere? As Europe can’t be Europe without Greece – ask Zeus! – it would fit brilliant to kill the Euro and give Drachma to the whole Euro-zone. But even better would be a world wide currency: Drachma! All states who don’t accept we send N.A.T.O.

  2. oh NATO-POUNTO is always good to enforce your will

  3. it wont work isnt that what argentina did in a way and they defaulted. they didnt use the dollar but they linked their currency to the dollar which is similar. and the debt will still not go away you just change its name from yannis to yannakis. and instead of europe on our backs we will have the USA cos a a default on dollar currency will affect them directly im guessing. but then again im only a pour mortal and not a high priest of economics the equivalent of modern gods and high priests.

  4. After leaving the euro, most likely would be sovereign debt default , or repayment at devalued drachma rates set by Greece at exit . The last thing people might want under the circumstance maybe would to be under another foreign currency – clearly US and IMF funding might enter the equation , direct investment and so on. Greece would be in a position to balance Euro vs. Dollar investment against each other to a certain degree , though foreign capital needs and most likely negative EZ sentiment to renew lending after default would most likely mean the US would directly or indirectly play a main part . That is not even the main part of circumstance – I would be more concerned by what political strands would have sway and the social and economic direction being introduced at that point , that would dictate the future make up of Greece to a large degree as well as influence the quantity of outside influence allowed over Greece’s future, and by who or along what lines.

  5. The US Dollar to make a return to Greece? I love it. I long for the days in Glyfada where a dollar bought you a souflaki, beer, and the taxi ride home.

    Bring the dollar back!

  6. keeptalkinggreece

    Those were the days, my friend, you thought they’d never end…

  7. Greece should become the 51st US state.