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:
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.
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.